An interim report of the Study Commission on Private Passenger Automobile Insurance

AN INTERIM REPORT OF THE STUDY COMMISSION ON PRIVATE
PASSENGER AUTOMOBILE INSURANCE
Submitted to Governor Rose Mofford,
President Robert Usdane, and Speaker Jane Hull
Study Commission on Private Passenger
Automobile Insurance
Dr. L. A. Wilson 11, Chairman
Senator Pete Corpstein
Senator Bill DeLong
Senator Jesus Higuera
Representative Dave Carson
Representative Sandra Kennedy
Representative Karen Mills
Ms. Susan Gallinger
Mr. Lee A. Prins
Mr. David Hurlbut
Mr. Kirby Garrett
Mr. Lanny Hair
Mr. Bill Monie
Mr. Lou Zuccaro
March 8, 1989
Table of Contents
I1 . Assessing the Competitiveness of the Insurance
MarketinArizona . . . . . . . . . . . . . . . . . . . . . . . 9
IV . Examination of Reasons for Rising Costs of Private
Passenger Auto Insurance . . . . . . . . . . . . . . . . . . . 22
V . No- Fault Insurance . . . . . . . . . . . . . . . . . . . . . . 27
VI . Traffic Safety Issues . . . . . . . . . . . . . . . . . . . . 32
VII . Recommendation I: Defensive Driving Schools . . . . . . . . 39
VIII . Recommendation 11: No. Fault . . . . . . . . . . . . . . . . 40
IX . Bibliography of Exhibits/ Reports/ Laws . . . . . . . . . . . . 42
X . Votes of Commission Members . . . . . . . . . . . . . . . . . . 46
I. Introduct ion
The Study Commission on Private Passenger Automobile Insurance was
created by House Bill 2021 during the 1988 legislative session. As
outlined in this legislation, the Study Commission is to achieve the
following objectives:
1. To review private passenger automobile insurance rates,
trends, and reasons for escalating rates.
2. To compare the private passenger automobile insurance
rates with the rates of other states.
3. To examine various rating systems, including prior
approval of rates and competitive rating, as well as the
impact of such systems on the affordability and
availability of auto insurance.
4. To examine the administrative costs and manpower
requirements of the Department of Insurance in
connections with the administration of various rating
systems.
5. To examine alternative systems - for payment of auto
insurance claims and whether such systems can have a
positive impact on auto insurance rates.
6. To examine other aspects of the auto insurance system to
determine if other changes should be implemented to
promote avai 1 abil i ty and affordabi 1 i ty of auto
insurance.
7 . To make recommendations regarding its findings.
The Study Commission, according to this legislation, is to prepare and
submit a report to the Legislature and the Governor no later than December
Since the passage of House Bill 2021, a number of events-- most notably
the passage of Proposition 103 in California-- have brought the issue of the
regulation of the private passenger automobile insurance industry to the
top of the public agenda. If the Study Commission is to have a meaningful
role in the current discussion of pub1 ic pol icy regarding automobile
insurance in Arizona, it is clear that an interim report must be submitted.
While the Study Commission understands the need to submit an interim.
report, we are committed to the continuation of the work of the Commission
and intend to issue a final re~ ort in December of this year.
In order to facilitate the drafting of the Interim Report, the
following ground rules were adopted:
1. Individual members of the Study Commission were given
reponsibility for drafting portions of the report.
2. Individual members of the Commission were asked to
ground their comments in the research materials that
have been brought forward to the Commission.
3. Specul ation about the constitutional i ty or pol i tical
feasibility of specific suggestions was to be avoided.
The test that was used was that of " reasonableness,"
recognizing that reasonable men and women frequently
disagree about the constitutionality or political
feasibility of specific policy recommendations.
4. The Interim Report was to be organized by sections and
individual members of the Commission were to be given an
opportunity to vote on individual sections of the
report. Votes of individual members were to be
recorded.
While it is obvious that individual members of the Commission possess
sometimes strongly held personal opinions about the proper role of
government in the regulation of the insurance market, the Study Commission
has held itself to a standard which demands that an empirical base support
expressions of preference. In attempting to meet t h i s standard, the Study
Commission has sought t o review the empirical 1 i t e r a t u r e related to each of
the questions brought before i t and the Interim Report seeks to convey what
the Study Commission has found t o t h i s point.
The Price of Automobile Insurance In Arizona
In 1986, the average private passenger automobile insurance premium in
Arizona was reported t o be $ 553.84, a figure which ranked Arizona f i f t h in
the nation in terms of the cost of such insurance. The 1987 average cost of
$ 601.96 caused Arizona t o be ranked as having t h e f o u r t h most expensive
automobile insurance premium in the nation.
Subsequently, A. M. Best-- the private reporting service compiling t h i s
information-- was taken t o task by o f f i c i a l s in Arizona f o r f a i l i n g t o
properly estimate the number of private passenger automobiles in Arizona.
In p a r t i c u l a r , pick- up trucks are excluded from the calculation of the base
used in computing the average cost by A. M. Best. Arizona apparently has one
of the highest number of such vehicles, on a per capita basis, in the nation
and these vehicles figure prominently in private passenger transportation
( as compared t o e i t h e r farm or commercial use). I f the suggestions for
a l t e r a t i o n i n the base were accepted by Best, i t i s argued t h a t Arizona
would rank somewhere between 14th and 16th in average premium cost.
Regardless of where Arizona ranks nationally in terms of policy c o s t ,
i t i s c l e a r l y and unarguably the case t h a t insurance premiums have increased
a t an alarming r a t e during the past decade. A. M. Best estimates t h a t
average premiums in Arizona have increased by 99.63% between 1982 and 1987.
A survey undertaken by the Arizona Department of Insurance on behalf of the
Study Commission provides some insight into the increases which have been
experienced by selected types of premiums. The data presented in Table I. 1
represents the median values of different types of premiums from 1980
through 1987.
TABLE 1.1
Cost of Different Types of Automobile Premiums
1980 - 1987
Median Values for A1 1 Companies
Type of Premium 1980 1981 1982 1983 1984 1985 1986 1987
Bodily Injury $ 106 $ 104 $ 149
0% - 2% 41%
Property Damage $ 55 $ 64 $ 69
0% 16% 25%
Medical Payment $ 19 $ 20 $ 22
0% 5% 16%
Comprehensive $ 52 $ 57 $ 58
0% 10% 12%
Collision $ 100 $ 110 $ 121
0% 10%. 21%
Uninsured
Underinsured $ 5 $ 5 $ 7 $ 9 $ 11 $ 12 $ 14 $ 19
0% 0% 40% 80% 120% 140% 180% 280%
Percentages are based upon change in the premium from the value of the
premium in 1980.
In coming to an appreciation of these increases, it is useful to cast
them in terms of the context in which these premiums are assessed. Using
the same 1980- 1987 period, Table I .2 contains various information deal ing
with estimated population growth, numbers of drivers, accidents and the
like.
TABLE I .2
Changes in Selected Characteristics of the Insurance
Confext in Arizona: 1980- 1987
Characteristic 1980 1987 % Change
Popul at i on
Licensed Drivers
Passenger Vehicle
Registrations
Miles Driven
Accidents
Injuries
Fatalities
Semi- private Hospital
Room Charge
Motor Vehicle Theft Rate
SOURCE: Statistical Abstract of the United States; ADOT, Traffic Records
Unit; A. M. Best; Health Insurance Association of America, " Survey of
Hospital Semi - Private Room Charges" ; FBI Uni form Crime Reports rate per
100,000.
On April 15, 1987, Arizona increased the maximum speed 1 imit on i t s
rural i n t e r s t a t e highways to 65 mph. The Arizona Department of Public
Safety
Table 1.3
Estimated Impact of 65 MPH Speed Limit
% Change
Type of Accident April ' 87 - April ' 88
- - - - --
Urban Rural
All accidents t .75% + 9.76%
Non- injury accidents t 3.30% + 3.00%
Injury accidents - 5.51% + 20.20%
Fatal accidents - 48.00% t37.23%
SOURCE: " Impact of the 65 MPH Speed Limit," Arizona
Department of Public Safety, Highway Patrol Bureau.
The c l e a r implication of these data i s t h a t the 65 MPH speed l i m i t i s
associated w i t h a substantial increase in t r a f f i c i n j u r i e s and f a t a l i t i e s - -
an increase which contradicts a general trend toward reduced i n j u r i e s and
f a t a l i t i e s observed for those driving s i t u a t i o n s in which the 55 MPH speed
l i m i t s t i l l prevails.
Requl a t i on
Insurance r a t e regulation in Arizona i s governed by T i t l e 20 of the
Arizona Revised S t a t u t e s . Chapter 2, A r t i c l e 4.1 of T i t l e 20, commonly
referred t o as Arizona's " Use and File" law, c r e a t e s t h e legal framework
within which the Department of Insurance must conduct i t s r a t e reviews and
make decisions about rate filings. Under this statute, every authorized
insurer and rate organization must file all rates and supplementary rate
information within 30 days after the rates become effective. Insurers do
not have to receive the Director's approval and may use the rates unless
the Director disapproves them. If the Department believes that one of the
rate making standards has been violated, an order must be issued to
disapprove the rates. The order does not affect any policy issued prior to
the effective date of the order ( ARS 20- 388); and, the order is not
effective until 30 days after it is issued. Any insurer or rate
organization disagreeing with the Director's order may request a hearing
and seek judicial review which stays the order ( ARS 20- 396). The rate
making standards require that an insurer shall not charge rates that are
excessive, inadequate or unfairly discriminatory ( ARS 20- 383). In
particular, the " excessive" standard is keyed to competition.
Rates are presumed not to be excessive if a reasonable
degree of price competition exists . . . with respect to
a particular class of business . . . A competitive
market is presumed to exist, unless the Director, after
a hearing, determines that a reasonable degree of price
competition does not exist in the market . . .( emphasis
added, ARS 20- 383.8)
If, after a hearing, the Director finds competition doesn't exist, the
Director may prescribe by order a permissible percentage increase in a
particular class of business. The order expires one year after its
effective date.
The Director could also order that rates be filed 30 days before their
effective date if the Director finds after a hearing that a noncompetitive
market exists ( ARS 20- 385.0). The order would remain in effect until the
Director determines that a competitive market has been restored.
Finally, the validity of rates is not statutorily limited by time.
Consequently, rates do not have to be renewed. The Department of Insurance
does not currently have the authority to require an insurer to periodically
refile its rates, once those rates have been successfully introduced.
11. Assessing the Competitiveness of the
Insurance Market in Arizona
The existence of real competition is critical to the efficient
functioning of an unregulated insurance market. In Arizona, insurance
rates cannot be found to be " excessive" under current law if a " reasonable
degree of price competition" is found to exist in the insurance market ( ARS
20- 383. B).
In examining the vitality of the Arizona insurance market, a variety
of indicators should be addressed. Those who study markets generally agree
that highly competitive markets are characterized by:
1. slightly differentiated products that are close
substitutes;
2. a sufficiently large number of producers each providing a
small enough proportion of the industry's output so that
no single firm or small group of firms has signficant
market power; and
3. the absence of economically significant barriers to entry
and exit.
These criteria for assessment of the presence or absence of competition are
fairly reflected in ARS 20- 383( B). In addition, state law in Arizona
includes " rate differentials in a particular class of business ( ARS 20-
383( B)" as an indicator of competition in the insurance industry.
Price differenti a1 s may be particularly useful in addressing the
question of collusion in the setting of insurance rates in Arizona. That
is, given the presence of a private rating bureau ( ISO), one critical
perspective might argue that all-- or at least a subset of companies-- would
offer the same price for their product. The annual survey conducted by the
Department of Insurance clearly indicates that, for the hypothesized
" typical" consumer, a wide variation in premiums exits in Arizona. For
instance, in a report released February 18, 1988 reported six month
premiums for a specific hypothetical consumer that ranged between a low of
$ 354.81 and $ 1,053.00 for a resident of Phoenix and $ 300.88 and $ 547.00 for
a resident of Tucson. In a recent survey of the top automobile insurers in
Arizona ( having a combined market share of 55.8%), the Department of
Insurance attempted to develop insurance quotations based upon a variety of
hypotheticals. The difference in price between the highest and lowest.
premium quote ranged from $ 260 to $ 470 for these different hypotheticals.
Quite clearly, the consumer should expect to find substantial differences
in the price of insurance when seeking quotes from different insurance
companies.
Examining the three criteria for the assessment of competition
out1 ined above, it is clear that there is relative ease of entry and exit
from the Arizona insurance market, An actual company's view of the ease of
entry into the Arizona insurance market will, of course, include an
assessment of the general legal or regulatory environment as well as
prevailing market conditions. However, the formal requirements for entry
into the Arizona insurance market-- out1 ined in ARS 20- 210 and generally
requiring $ 900,000 or $ 1,500,000 capital and surpl us funding, depending
upon the type of company that is writing automobile insurance-- are
considered to be about average when compared with the same requirements in
other states.
An example of the ease of entry to the Arizona market is found in the
experience of the American Family Insurance Company. Entering the market
in 1985, American Family achieved a 4.4% market share and ranked fourth
among all insurance companies doing business in Arizona in 1987.
The tests typically employed by economists to test the existence of
competition emphasize the market share of insurers. A test employed by the
U. S. Department of Justice to evaluate the competitive effects of mergers
and acquisitions is referred to as the Herfindahl- Hirschman Index. This is
the index that has been employed by Hofflander, Nye and Charlesworth ( AN
ECONOMIC ANALYSIS OF THE CALIFORNIA INSURANCE INITIATIVES, 1988) and the
General Accounting Office ( AUTO INSURANCE: STATE REGULATION AFFECTS COST
AND AVAILABILITY, 1986) in their respective assessments of the
competitiveness of the automobile insurance market. Hoffl ander, et. a1 . ,
provides an interesting benchmark against which the Arizona insurance
market can be compared. Taking data from A. M. Best relative to the Direct
Written Premiums for private passenger automobile liability insurance for
1981 through 1987, the Herfindahl- Hirschman Index has been computed for
each of these years for Arizona and these data are presented in Table 11.1.
The value for this index ranges from a high of 1080.6 ( 1981) to a low of
904.8 ( 1987). The U. S. Department of Justice classifies an industry as
highly concentrated if the Herfindahl- Hirschman Index has a . value greater
than 1800. Values of this index between 1000 and 1800 are defined as
moderately concentrated whi 1 e val ues fa1 1 i ng be1 ow 1000 are considered
unconcentrated ( Hofflander, Nye, and Charlesworth, 1988: 20). During the
course of these years, the Herfindahl- Hirschman Index began at a level
defined as moderately concentrated and has generally declined, indicating a
trend toward the Arizona insurance market becoming somewhat more
competitive.
Another perspective on the meaning of this index value is found in
comparing the values of the Herfindahl- Hirschman Index in Arizona with its
value in California and the U. S. as a whole. A comparison of these various
TABLE 11.1
Examining Issue of Industry Concentration through Use
of the Herfindahl- Hirschman Index and Market Shares:
Arizona, California, and the United States
Number of H- H Industry Concentration
Year Groups Index 4- Group 8- Group 20- Group
Arizona 1981 80
1982 79
1983 8 1
1984 8 0
1985 79
1986 7 8
1987 85
Cal i forni a 1981 144
1982 144
1983 152
1984 149
1985 146
1986 149
1987 N A
United States 1981 440
1982 446
1983 458
1984 456
1985 - 471
1986 458
1987 483
SOURCE: Arizona data taken from annual A. M. Best, BEST'S EXECUTIVE DATA
SERVICE for 1981 thru 1987. Data for California and the United States taken
from Hoffl ander, Nye and Char1 esworth ( 1988: 17- 18).
values indicates that California has a substantially more concentrated
insurance market than the United States as a whole and that Arizona is even
more concentrated than California.
Another measure of industry concentration is found in the proportion
of the total market that is captured by 4- Group, 8- Group, and 20- Group
companies. For instance, the national average in 1987 finds 40.4% of
premiums written by the t o p four companies. In California, 49.6% of the
premiums are written by the t o p four. For Arizona, the t o p four companies
write 53.5% of all automobile insurance premiums. Again, these data
indicate that Arizona's automobile insurance market is more concentrated
than either California or the national market.
The general trend in Arizona-- and in Cal i forni a-- i s toward greater
competition in the insurance market whether measured by the Herfindahl -
Hirschman Index or by 4, 8, and 20 group percentages. Interestingly, the
national data seem t o be at a lower general level of concentration b u t
heading in a direction toward less competition, when assessed by either of
these c r i t e r i a .
As noted earlier, ARS 20- 385( D) changes the " use and. f i l e " approval
standard to " prior approval" of the Director if the Director finds that the
marketplace i s noncompeti tive. The regulation further calls for this
provision t o remain in effect until the Director determines that a
competitive market has been restored.
Since 1980, whe'n=^ h' eu se and file" provision was adopted, no Director of
the Department of Insurance has declared the Arizona insurance market
noncornpeti tive. However, i t may be useful t o conceive of competition as a
continuous, rather than dichotomous, concept. That i s , the question should
be framed in terms of the magnitude or extent of competition in a market,
not i t s simple presence or absence.
Cast in these terms, one might acknowledge t h a t , compared with
n a t i o n a l and Cal i f o r n i a i n s u r a n c e m a r k e t s , t h e Arizona market could
reasonably be encouraged to become more competitive, without having to
conclude t h a t the Arizona insurance market i s " noncompetitive."
111. Prior Review
Until the 1960' s, most s t a t e s employed a " prior approval" system of
insurance rate regulation. Under these systems, insurance companies were
required to submit t h e i r proposed premiums to a s t a t e Department of
Insurance for review and approval. During the 1960' s, many s t a t e s moved
away from prior approval to a competitive rating model. Ironically, i t is
California that i s viewed as pioneering the competitive rating approach
following i t s adoption of t h i s l a t t e r approach in 1947. Arizona joined
t h i s general trend toward competitive rating following a 1979 Auditor
General's report in which i t was argued that:
I t appears that prior approval of insurance rates i n
Arizona i s not necessary and could be eliminated for all
but a few lines of insurance i f the s t a t e adopted a
competitive or " open competition" rating law and that by
so doing the approval of insurance r a t e s could be
accomplished more economically and e f f i c i e n t l y .
( PERFORMANCE AUDIT OF THE ARIZONA DEPARTMENT OF
INSURANCE, Office of the Auditor General, 1979, p. 44)
While analysts typically deal with s t a t e rating laws as i f there were
but two approaches-- relying upon e i t h e r market competition or p r i o r
approval-- there, in f a c t , are a wide variety of types of ways s t a t e s have
gone about " regulating" the insurance industry. In 1974, the National
Association of Insurance Commissioners ( NAIC) developed the fol 1 owing
c l a s s i f i c a t i o n of rating laws ( GAO, 1986: 82):
State- made rates: The s t a t e insurance department, in
consultation with insurance industry representatives,
promulgates the r a t e s t o which all insurers must adhere.
Mandatory bureau rates: All insurers operating in the
s t a t e must obtain membership in a rating bureau, which
seeks prior approval of a common bureau r a t e .
Prior approval laws: All insurers must f i l e thcir
proposed rates w i t h the s t a t e insurance department arid
provide data with these f i l i n g s to support the contention
t h a t the r a t e s are not " e x c e s s i v e , inadequate, or
unfairly discriminatory."
Modified prior approval laws: Insurers can revise rates
without prior approval i f based solely upon a change in
loss experience. However, rate revisions based upon
expense re1 at ionships or rate c l a s s i f i c a t i o n s are s t i l l
subject to prior approval.
Fi 1 e- and- use 1 aws ( bureau rates advisory only) : Rates
become e f f e c t i v e immediately upon f i l i n g , with no
a f f i r m a t i v e action of the insurance commi s s i o n e r
required. However, under f i 1 e- and- use 1 aws in states
that require adherence to bureau r a t e s , f i l i n g s made by a
rating organization on behalf of insurers must be adhered
to bv t h e i n s u r e r unless t h e i n s u r e r f i l e s f o r a
deviation.
File- and- use laws ( adherence to bureau rates required).
Use- and- file laws: Rates must be f i l e d within some
specified period of time AFTER being used in the s t a t e .
No f i l i n g laws: Insurers are not subject to any f i l i n g
requirements.
Since the development of this c l a s s i f i c a t i o n scheme, another form of prior
approval has been adopted by three s t a t e s and generally referred to as
"' Flex rating." In t h i s version of prior approval, insurers are permitted
a specified increase in rates ( typically defined in percentage terms)
without seeking prior approval from a Department of Insurance ( or other
regulatory agency). An a1 ternative to the percentage c r i t e r i o n , the flex
band may be tied to the local Consumer Price Index ( CPI) on insurance loss-relevant
items. If a proposed increase i s greater than t h e " f l e x band"
specified in the law, the insurer must seek the prior approval of the
regulatory authority.
? he intention o f the " f l e x rating" system, of course, is to balance an
interest in previewing rate increases ( as under a prior approval system)
with a desire to limit the cost of administering a regulatory policy ( as
under a market or competitive system) and, at the same time, achieve the
efficiencies expected of a sjstem which relies upon competition in the
marketplace. Unfortunately, the experience of other states with this
system is so new that no studies of the flex rating system are available
for review by the Study Commission and, consequently, flex rating is not
included in the analysis which follows.
For purposes of analysis, most researchers collapse the various
systems outlined by NAIC into those which are " competitive" and those which
rely upon regulation or are " noncompetive." Viewing the order of
presentation of the rating schemes as reflecting the amount autonomy-- from
low to high-- given insurers in the setting of rates, states with '' State
Made Rates" through " Modified Prior Approval " are considered
" noncompetitive." States with the remaining procedures are considered
" competi tive."
A number of empirical stgdies of the effect of prior approval upon
insurance premiums exist in the literature. The 1986 report by the U. S.
General Accounting Office ( AUTO INSURANCE: STATE REGULATION AFFECTS COST
AND AVAILABILITY, p. 23) conpared the experience of 20 states with
competitive rating systems with 24 slates with noncompetitive or prior
approval systems. Aggregating the data taken from 1975 through 1983, this
analysis finds the following:
Table 111.1
' 3mpetitive Noncompetitive
Z~ ting States Rating States
: 80 Observations) ( 216 Observations) Diff
Physical Damage:
Average Premiums $ 134.79 $ 143.20 $- 8,41*
Average Losses 88.93 96.86 - 7.93*
Premi ums/ Losses 1.53 1.49 .05*
Li abi 1 i ty:
Average Premiums 197.30 194.22 3.06
Average Losses 133.77 134.76 - 0.98
Premiums/ Losses 1,49 1.47 0.02
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* indicates s t a t i s t i c a l significance
For physical damage insurance, b o t h average premi um and average 1 oss are
higher in the noncompetitive or prior review s t a t e s . The r a t i o of premiums
to losses, however, were l o w ~ rin states with prior approval systems. All
three of these differences ? re s t a t i s t i c a l l y s i g n i f i c a n t . When one
examines the analysis of the data for l i a b i l i t y insurance, none of the
differences are s t a t i s t i c a l l y cignificant.
In an entirely d i f f e r e c h e t of analysis, Kenneth 3. Meier ( THE
POLITICAL ECONOMY OF REGULATISY: THE CASE OF INSURANCE, 156- 1571 notes
that regulation can d i s t o r t market prices in two ways. If regulation i s
sought by the regulated i n t i s t r y f o r i t s own b e n e f i t ( e . g . , George
S t i g l e r ' s theory of r e g u f a t i c - ) , prices in a regulated market should be
higher- On the other hand, - f a monopoly or near monopoly e x i s t s , the
introduction of regulation cc ; ld serve to reduce the a r t i f i c i a l l y high
monopoly prices. Meier argues that the structural c h a r a c t e r i s t i c s of the
insurance market do not esti-; rs those of a monopoly and, consequently, he
suggests t h a t regulation shol,- a serve to INCREASE t h e p r i c e of insurance.
In his comparison of s t a t e s with " competitive" and " noncompet i t, ivt." tea tt?
syst, ems, he argues t h a t :
In no c a s e a r e t h e r a t e s in r e g u l a t e d s t a t e s
s i g n i f i c a n t l y d i f f e r e n t from t h e r a t e s in l e s s regulated
s t a t e s , a f i n d i n g c o n s i s t e n t with the other empirical
1 i t e r a t u r e ( see Harri ngton, 1984). The c l e a r conclusion
i s t h a t r e g u l a t i o n , i n g e n e r a l , has no impact on the
p r i c e of insurance.
The GAO report noted above a l s o includes a comparison of competitive
and p r i o r approval s t a t e s broken down by whether the s t a t e uses a n o - f a i i l t
or t o r t l i a b i l i t y system and provides f u r t h e r i n s i g h t into t h i s i s s u e :
Table 111.2
No- Faul t Li abi 1 i t y S t a t e s
Competitive Noncompetitive
Rating S t a t e s Rating S t a t e s
( 87 Observations) ( 62 Observations) D ? f f
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Physical Damage:
Average Premiums $ 124.56 $ 141.36 $- 35.80*
Average Losses 82.06 96.84 - 14.78*
Premiums/ Losses 1.55 1.47 .07*
L i a b i l i t y :
Average Premiums 202.57
Average Losses 144.57
Premiums/ Losses 1.42
Table 111.3
Tort Liability States
Competitive Noncompetitive
Rating States Rating States
( 93 Observations) ( 154 Observations) Diff
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Physical Darna* ge:
Average Premiums $ 143.42 $ 143.94 $- 0.52
Average Losses 95.36 96.88 - 1.52
Premiums/ Losses 1.52 1.49 ' 03
Liability:
Average Premiums 192.37 180.29 12.07
Average Losses 123.67 120.94 2.93
Premiums/ Losses 1.56 1.51 0.05"
* indicates statistical significance
Iriterestingly, there are no differences in premiums or losses for
either physical damage or liability insurance tort states with competitive
or prior rev. iew rate setting procedures. The differences which are noted
bet~ een competitive and prior review systems are only found in no- fault
in; grance states. In this instance, significantly lower premium and lower
losses are noted for those states with competitive rate setting.
While most states have adopted one or another of the insurance rats
regulation strategies noted above, an additional alternative is found in an
excess profits tax which might be useful as one strategy by which to avoid
the apparent inefficiencies o f a prior approval system yet provide for the
systematic review of insurance rates with an eye toward ferreting out
instances of excessive rates. The three considerations which figure
promintently in an excess profits tax include:
1. underwriting income ( gain or loss);
2. Investment income ( gain or loss);
3. The period or cycle that is used i n calculating the
underwriting and investment income ( e. g., 5 or 6 years).
Like a flex rating system, some expectation of what constitutes 2.-
appropriate profit level must be decided upon but, whereas the flex rat, ir?
s. ystec; focuses upon the increase i n premium cost, the excess profs ts
criterion would specify the acceptable rate of return that could be claire:
by an insurance company.
IV. Examination c i Reasons for Rising Costs of
Private Paj: enger Auto Insurance
The evidence and testimony so far brought before our Commission have
stirfaced numerous " allegedn causes of the spiraling rates for auto
insurance ' n Arizona. These " a: legedn causes have been grouped into four
categories, i . e., Regulatory Deficiencies, Traffic Safety Deficiencies,
K i sing Cl ajms Costs, and Fraud,' Crime for purposes of discussion, even
though several of these categories overlap. The following is an outline of
these alleged causes along wi: h some of the evidence or explanatory
i n f o r m a t i o n brought forth in our review.
" Alleqed" Reasons for Hiqh Auto Insurance Rates
A. Regulatory Deficiencies
1. INSURERS ARE MAKIN; EXCESSIVE PROFITS
In support o f this thezis:
a. Average a u t ~ insurance rates have been estimated by
A. M. Best to have increased 106% in Arizona ir! the
period of 1581- 1987 -- the most, nationwide in that
peri od .
b. These averase increases have outpaced local Ccnsumer
Price Indices.
c. Arizona auto rates are also estimated by A. M. Best to
be the 4th wst expensive in the country, yet we have a
re1 at i vel y snal 1 popul at i on and don't have anywhere
near the 1e; rel of industrialization of many other
states with Yower rates.
d. Insurance cwpany stocks were reported to have been
selling at ' ncreased levels with generally higher
price: earn:? gs ratios in 1986 and 1987.
In Opposition to This ' 9esis:
a. The Arizona Department of Insurance's preliminary
reports ind'zated that between 1981 and 1987 Arizona
" earned pre-' urns" increased 237% industrywide while
incurred 1 G: ses outpaced those increases by spi )- a1 ing
up 255%.
b. While premium increases outpaced the increases i n local
Consumer Price Indices, they f e l l short o f the average
increases i n the components o f the indices t h a t r e l a t e
t o medical costs, body work and crash parts. For
example, Arizona's average semi- private hospital room
rate at $ 225 per day was almost twice that o f the
Countrywide average rate of about $ 120. I n fact,
Arizona's average hospital room charges jumped by over
114% between 1981- 1987 and d a i l y charges jumped by 40%
i n only the l a s t 3 years.
c. The size and level of i n d u s t r i a l i z a t i o n o f a state have
f a r less relevancy t o auto rates than do density o f
popul a t i on, number and adequacy o f roadways,
a v a i l a b i l i t y of public transport, average miles driven,
level o f t r a f f i c safety measures, etc.
d. A1 though many insurers' stock prices increased i n 1986
and 1987, t h i s was due t o severely depressed prices and
values previously, because o f the bottoming- out o f the
six- year property and casual t y underwriting cycle i n
1985.
e. The Insurance Commissioner o f the neighboring state o f
Ca1 i f o r n i a t e s t i f i e d before the Cal i f o r n i a l e g i s l a t u r e
and presented a Departmental study o f " Cornparat i ve
Returns on Average Net Worth Ratiosn indicating t h a t
p r o p e r t y and casualty i n s u r e r s ' f i v e year average
r e t u r n on net worth was 8.36% from 1983- 1987; whereas,
D i v e r s i f i e d Fi nanci a1 companies averaged 11.92% i n the
same period. The Commissioner summed t h i s up by saying
t h i s was " f a i r l y pedestrian."
f. The Hoffl ander, Nye, Charlesworth study and testimony
i n d i c a t e d t h a t p r o p e r t y and c a s u a l t y i n s u r e r s had
returns on equity 5.4% lower than comparable r i s k
investments i n the period o f 1981- 1987.
g. While acknowledging t h a t o u r a u t o r a t e s are
unacceptably high, the Arizona Department o f Insurance
has challenged A. M. Best's ranking o f us as t o having
the fourth highest auto rates. The Department o f
Insurance challenge that Best's calculations used the
proper number of vehicles registered, f a i l e d t o account
f o r the impact of the number of uninsured motorists and
nonresident motorists i n the state or t h a t our premiums
in cl ude mandated UM coverages, r ej ectabl e e ls ewhere i n
the country,
2. INSURERS ARE INEFFICIENT AS TO THFIK OWN ADMINISTRATIVE
EXPENSES.
I n Support o f This Thesis:
a. C h r i stopher Horphous o f Cal i f o r n i a ' s V o t e r Revol t
charged t h a t t h e p r o p e r t y and c a s u a l t y i n s u r a n c e
i n d u s t r y ' s administrative casts ( about 30%) should be
much c l o s e r to t h a t o f p u b l i c u t i l i t i e s ( about 6%).
b. Another witness couldn't understand why Blue Cross and
Blue Shield could r e t u r n almost 90% o f the premium
d o l l a r i n b e n e f i t s w h i l e auto insurers t y p i c a l l y only
r e t u r n about 70%.
I n Opposition t o This Thesis:
a. Beth Charlesworth pointed out t h a t the nature o f the
business o f a p u b l i c u t i l i t y was vary s u b s t ~ n t i v e i l y
d i f f e r e n t than t h a t o f an i n s u r e r and t h a t claims
hand1 i n g and law s u i t defense are v e r y expensive
m a t t e r s . Moreover, i n s u r e r s are s u b j e c t e d t o
marketing, sales commission and a d v e r t i s i n g expenses
n o t experienced by u t i l i t i e s , which f u n c t i o n as
monopol i es.
b. Insurance company o f f i c i a l s also t e s t i f i e d t h a t Blue
Cross and Blue Shield were f i r s t party c a r r i e r s n o t
f a c i n g the expenses o f l i a b i l i t y claims a d j u s t i n g and
law s u i t defense, indigenous t o l i a b i l i t y insurance.
3. INSURERS ARE COLLUDING, CAUSING A FAILURE OF COMPETiTION I N
THE MARKET PLACE
NOTE: This a l l e g a t i o n i s covered i n d e t a i l i n Part I 1 o f
t h i s r e p o r t concerning " Issues Surrounding the Existence o f
a Market."
4. INSURERS AREN'T REGULATED ENOUGH EITHER BY GOVERNMENT OR
MARKET FORCES
NOTE: This a l l e g a t i o n i s covered i n d e t a i l i n Part 111 o f
t h i s r e p o r t concerning " Issues Surrounding the Role o f
Regulation i n the Management o f the Insurance Market."
B, TRAFFIC SAFETY DEFICIENCIES
The Arizona Department o f Insurance reports the numbers ( frequency) of
accidents and i n j u r i e s are increasing i n Arizona at about twice the r a t e of
t h a t o f the courrtr- ywide average, i . e . , 3.98% per year versus 1.93% per
year. Some o f the more important arguments presented indicate these
1. Growing populations and increasing miles driven. For
example, from 1981- 1987 Arizona's popul at ion grew by 18%,
the number o f miles driven grew by 36% and the number uf
accidents i~ corded grew by 37%.
2. Increasing traffic density on clogged, insufficient and
deteriorating roadways.
3. The failure of traffic safety measures and lax enforcenent
related to:
a. Driving and substance abuse;
b. Increased speed and speed limits;
c . Failure of seat belt usage;
d. Failure of vehicle safety maintenance;
e. Insufficient left turn controls and the " right on red"
rul e .
f. Misuse of the violation expungement rule for multiple
offenders;
g. Failure of enforcement of rules against uninsured
motorists.
C. RISING CLAIM COSTS
The ~ s s ntiu de ( severity) of claim costs is increasing.
1. The Arizona Department of Insurance reports that the average
bodily injury claim cost in Arizona is rising at about 8.82%
a year; and, at $ 8,000 per case in 1987, was almost 13% per
case higher than the countrywide average.
2 . The Arizona Department of Insurance reports that the average
property damage claim cost in Arizona is increasing at about
9.29% a year; and, at $ 1,315, was 6% per case higher than
the Countrywide average.
The magnitude : f case value . and the rturnbe~ o f c a s e s
contested are be- ; eved to have grown also because o f :
a. Broadened c; verages and liability exposures, arisirq
legis'lative'j and judicially ( e. g., adoption of the
doctrine of pure comparative negligence; coverage
stacking; rke doctrine of " reasonable expectations,"
higher coverage 1 imi ts; etc. . . . ) ;
b. Narrowed cz~ erage exclusions and liability defenses,
arising legislatively and judicially; ( e . g . ,
eliminatior: of liability and uninsured motorist
coverage er: lusions; abrogation o f intra- family and
inter- spousrl immunities, as well as t h e g u e s t
statutes, e: c. ...);
c. Higher award; by more sympathetic juries;
d. The 3: 1, 4:; or even 5: 1 multiplier used to determine
the value c j i "' pain and suffering" damages relative to
medical and ' ost wages damages;
e. Greater awareness and acceptance of the ability to sue
and win large awards;
f. The ease of funding such suits via the attorney's
contingency fee system;
g. The increasjng number of attorneys available for
representiri? peopl e; and, the pub1 icts increased
awareness, o f attorney availability via now permitted
attorney adverti sing . In fact, AIRAC research data
indicates attorney representation in Arizona bodily
injury cases rose from 25.5% in 1977 to 43.8% in 1Y87.
( No data have ye? been gathered by the Com% ission in these
areas. )
a. Claimant fraut - staged accidents
b. Claimant fraud - exaggerated injuries
6 , Vehicle t h e f t
V . No- Fault Automobile Insura~ ce
Tile increasing cost of automobile insurance has caused renewed
interest in the concept of " no- fault" insurance. No- fault insurance i s not
a new idea. Xt was first introduced by two law professors, Jeffrey
O'Connell and Robert Keaton in 1965 in their report Basic Protection for
the Traffic Victim. They outlined a system that eliminated the requirement
that fjult be determined before the victim of an automobile accident can
receive compensation. Professor O'Connell asserts that two of the most
important factors zontributing to the high cost of auto insurance are non-economic
damages ( most commonly, pain and suffering) and the process of
determining fault. He argues that eliminating or at least minimizing these
two variables will result in significant reductions in the cost of
insurance.
In Arizona and other states that have traditional auto jnsurance
syst~? ms, motorists purchase third- party 1 iabil i ty insurance to protect
thenselves against lawsuits if they are negligent and cause injcries to
other persans. No- fault insurance differs in that motorists buy Personal
Injury Protection ( PIPA) which provides first- party coverage ( compensation
paid by a pol icyholder's own insurer rather than the insurance company of
the person that caused the accident) to them, their passengers and
pedestrians they may hit. With this coverage, the occupants of an
insured's car and pedestrians who suffer injuries can be compensated
quickly for medical expenses and other economic losses up to the PIP
coverage limits chosen by the insured or mandated by law. Typically, this
coverage pays for medical expenses, lost wages, rehabilitation, replacement
serv; ccl costs for such things as housekeeping and child care, and funeral
expenses. PIP usually excludes ceverage for insureds while motorcycling,
drunken driving, i n the carmission of serious crimes'. ( NOTE: P I F
coverage is different than Uninsured Motorist ( UM) coverage, which i s also
f i r s t - p a r t y coverage paid by your own insurer for medicals, l o s t wages,
e t c , e t c . ... however, UM depends upon a " faultw determination showing that
the accident was caused by someone else.)
The architects of the New York no- fault insurance law, which is
currently regarded as one of the best in the country, argue that an ideal
or true no- fault law should contain the following elements:
1. Compensation of a l l auto accident victims ( without
regard to fault or assets of the negligent party).
2. A generous package of f i r s t - p a r t y benefits sufficient to
provide for economic losses ( i . e . , the payment of a l l
necessary medical b i l l s , rehabil i tative care and an
adequate income during the period of disabil i ty.)
3. Prompt payment of benefits, including periodic wage loss
payments.
4. In order to finance the generous package of f i r s t - p a r t y
b e n e f i t s , the system must provide f o r the v i r t u a l
abolition of the right to sue for non- economic 103s
( pain and suffering) except i n the most serious cases,
The three key issues i n crafting a no- fault law are:
1. Whether the right t o sue i s to preserved to any extent
( i. e ., " pure" no fault would t o t a l l y eliminate the right
to sue in auto accident cases, but in return promises
the highest premium savings).
2. If the right t o sue is to be maintained in part, the
determination of the threshold that must be reached
before a p l a i n t i f f is eligible t o use the t o r t system to
sue for damages.
3. What benefit levels should be set for medicals, l o s t
wages, death, etc.
When no- fault laws were f i r s t adopted in the late 1960s the right to
sue thresholds invariably contained a set monetary amount. This had the
effect of driving up clairt costs because i t gave victims with minor
I n J u r l e s aq ~ n c e n t ~ vteo r u n up big medical b11ls i n order t o pass a
mo~~ et. aryth reshold to be el igible t o bring s u i t . ) This problem has led
proporents of no- fault to argue in favor o f verbal thresholds ( t h a t r e q u i r e
rnjurics to be both " serious" permanent") and against monetary ones.
In several s t a t e s , no- fault was simply tacked onto the l i a b i l i t y system,
assuring r n ~ n i r n u m benefits to everyone without limiting t h e i r a b j l i t y to sue
f3r more.
The following tables present a comparison of pure t ~ r tpr emiums and
p L r e no- f u l t premiums in the s t a t e s with no- fault insurance laws. ( NOTE:
~~~~~~ 1 premium are t h a t p a r t of actual premiums used to pay for claims;
t h e r e f o r e , the v a g a r i e s of a d m i n i s t r a t i v e and s a l e s expenses a r e
e l i n i n a t e d . ) Florida, Michigan and New York are the only s t a t e s t h a t use
verbal thresholds a t the present time.
Insert Table V. 1 Here
Critjcs of no- fault insurance contend t h a t s t a t e s that have adopted no-f
a u l t do not have lower insurance prices than s t a t e s without no- fault laws;
bowever, no s t a t e has adopted " pure" no- fault where the r i g h t to sue has
been t o t a l l y eliminated in auto accident cases. Moreover, the foregoing
c h a r t fndicates t h a t those s t a t e s adopting " verbal" thresholds experienced
substanti a1 premium savings.
" Mandatory" n o - f a u l t i n s u r a n c e i s a l s o c r i t i c i z e d as being
unconstitutifinal due to Article 4, Ssction 31 and Article 18, Section 6 of
the Arizona State C o n s t i t ~ l t i o n . However, the Constitution doesn't address t h e
i c t ~ d o f nnn- rdndatory ( I . ., " o p t i o n a l " n o - f a u l t ) e i t h e r of the variety
a1 ready i i d o p t t d I n Kentucky or that suggested by Professor OICor, rJl 1 .
Table V . l
A Comparison of Eztimated 1987 Tort Injury Coverage
Pure Premiums to 1987 No- Fault Injury Coverage ? ure Prernizms
Changes
in Injury
1987 Coverage
Estimated 1987 No- Faul t C0st. s Under
1957 Tort Pure Pure ho- Faul t**
Thresh07 d Premi urns Premiums 1987 1982
- V- e- r- b- a l T-- h-- r eshold
Fl orida
Mi cii i gan
New ' fork
Verbal 187.32 157.45 - 16% - 21%
Verbal 171.67 116.57 - 3 2 % - 1 7 %
Verbal 198.48 138.12 - 3CX - 6%
-.- - I -- h-- i- . eshold $ 1,000 o r More
tiawa i j $ 5,600 141.49 147.82 4% 37%
Minnesota 4,000 138.97 112.59 - 19% - 2%
Ut;* h 3, OOOf 82.22 85.00 3% - 13%
", I orado 2, 500f 90.70 131.86 45% 15%
p$ 3rth Dakota 2,500* 66.11 49.81 - 25% - 19%
K. n? ucky 1,000 93.96 75.06 - 20% - 29%
" T.--.-- h- reshold Less than $ 1,000
Geotagi a S 500 91.32 107.24 17% 15%
i < d i ? ~ d ~ 500f 74.90 58.87 - 21% - 9%
Massach~ isetts 500 231.70 173.99 - 25% - 33%
Connecticut 400 162.54 170.92 5% 14%
New Jersey 200* 183.59 226.77 24% 65%
Ada- On States
Oregon None 113.62 110.01 - 3 % - 0%
Del at% larc? None 108.56 173.13 59% 17%
Mary i and None 134.63 170.10 26% 26%
Pennsylvania None* 118.61 162.78 37% 53%
* Threshold was raised between 1982 and 1987. Colorado raised i t s threshold
from 5503 t o $ 2,500, effective 1/ 1/ 85. North Dakota raised i t s threshold
fi" om $ 1,000 to $ 2,500, effective 7/ 1/ 85. Hawaii's threshold was $ 1,500 i n
1982. Since 1982, the s t a t e ' s t o r t threshold has been raised several
times. Utah increased i t s threshold from $ 500 t o $ 3,000, effective 7/ 1/ 86.
Pennsyl vhnia el iminated i t s $ 750 t o r t threshold, e f f e c t i v e lO/ i; 84. New
Jerssy adopted an optional $ 1,700 t o r t threshold, e f f e c t i v e 7/ 1/ 84. Kansas
r a i s e d it.:; threshold to $ 2,0C0, effective 1/ 1/ 88.
*"* A n e g a t i v e r e s u l t i n d i c a t e : an insurance cost savings under no- fault. A
p o s i t i v e figure indicates an Trcrease in costs under no- fault.
This wuld g i v e the inaurance consumer a choice of purchasing e i t h e r
no- fault or tort- based automobile insurance. Under t h i s system, i f two no-f
a u l t insureds have an auto accident, each party's insurance company would
pay them for damages and losses sustained in the accident. If two t o r t -
based ins3reds suffered injuries in an accident, they would sue each other
as is the current practice in Arizona. Under Kentucky's system, i f a t o r t -
based insured and a no- fault insured were involved in an accident, the
party with no- fault would be compensated by his own insurance company and
the party with tort- based coverage could sue the no- fault insured's
insar; ince company for any negligence by the no- fault insured. Under
Professor O'Connell's approach, i f a tort- based insured and a no- fault
insured were involved in an accident, the party with no- fault would be
compensated by his own insurer and t h e p a r t y with t o r t based coverage could
sue his own insurance company to recover damages ( s i m i l a r t o the process
now used in uninsured motorist cases).
Either of these systems would minimize the costs of non- economic
damages and of adversari a1 1 egal proceedings, thereby offering a real
change f o r substantial and sustained premium savings!
ow No- Fault Auto Insurance Yorks - If We Let I t " ( extracted from the
Journal of American Insurance, Third Quarter, 1988).
' N O - ~ a u l t : Has the Performance Met the Promise?" by John D. Reiersen, CFE,
CPCU, Assistant Chief, Property and Casualty Insurance, S t a t e of New York
Insurance Department ( extracted from The Bulletin, S t a t e of New York
Insurance Department, March, 1985).
3 " ~ e l l i n g No- Fault Auto Insurance" by Peter Passel1 ( extracted from New
York Times, November 23, 1988).
VI. Traffic Safety Issues
lraffic safety issues impact the cost o f insurance to a considerable
degree. Accidents, and their causes and effects, together with the
p r o b a b i l i t y o f having an accident are major factors in increasing insurance
ci3sts. Generally, traffic safety is a combination of state- imposed and
self- generated ( by the driver) actions and restrictions, as well as the
vari o b s conditions and construction of the roadways traveled.
In the idea1 situation, a skilled driver, using courtesy, cauticn and
ktlert::? ss, would be most likely to avoid accidents. A key indicator, alor~ g
with those normally associated with stability, is a past record cf no
citations or accidents; the longer, the better. This is as it should be,
since the presence of citations or accidents are clear indicators of
accident probability, with higher frequency of either tending to assure the
probabilfty of at fault accidents in the near future.
In a study of California drivers, cocducted by Ray Peck for the
Jo: innal of Traffic Safety Education, 28% of drivers studied in one year
contributed to 56% of the accidents in the following year. Drivers with
two or more citations ( 10.2% of all drivers) had 34% of the accidents,
while th2se with one conviction ( 17.8% of drivers) had 32%. This points up
the need for tracking of drivers who fall into these categories.
The Arizona program couples mandatory insurance with certain actions
by the state. These include certification at the time of vehicle
registration, a requirement to carry evidence of insurance in the vehicle,
random sarnpl ing of vehicle owners to see if insurance was in effect at the
time of sampling and notification to the state that an accident occurred
and the pt3rsoq causing the accident did not provide evidence of insurance.
Queries are sent to the owner to prove that insurance was in effect at the
time of the accident.
In the random sampling, if the vehicle owner is found to not have
insurance, a suspension of the license and vehicle plates is made until the
owner brings in evidence that insurance has been obtained. This is done
through a special SR- 22 policy which provides for the insurance company to
notify the state if the policy is cancelled. In the cases where an owner
did not have insurance at the time of an accident, the suspension period is
one year for all owners' driver licenses, as well as the vehicle plates.
At the end of the year's suspension, an SR- 22 is required. People arrested
for driving on a suspended license or no insurance are subject to seizure
of the plates by the arresting officer.
Legislation passed in 1988 expands the scope of this program to
require police officers to check for evidence of insurance on all stops,
and after June 30, 1989 the random sampling would include persons cited for
driving with expired registrations and those who did not renew insurance or
cancelled their policy as provided to the state by insurance companies.
While the sampling of owners who were convicted of driving without current
registration is expected to turn up more drivers who may not have had
insurance, the sampl ing of pol icy cancellations may not reveal many people who
do not have insurance since they may have simply changed insurance companies.
Then, too, according to industry sources, vehicle owners who have had
insurance are more 1 ikely to continue to insure. It is the chronic offenders
and the poorer vehicle owners who are most 1 ikely not to have insurance.
Persons with many citations are subject to the highest insurance rates, as
much as $ 3,000 to $ 5,000 per year i. n premiums, and are therefore least 1 i kely
to o b t a i n insurance.
Testimony before the Committee also discussed such enforcement actions
as broader insurance samplings from those most likely not to have
insurance, such as those with many violations or accidents. It also
suggested a wider involvement by vehicle dealers to verify insurance before
a sale is completed, and by lenders to impound money for insurance
payments. It appears that further study is needed concerning the mandatory
insurance program and the methods used to verify insurance.
Traffic Safety
Another area of consideration has been the traffic safety training of
drivers. The education of drivers begins with obtaining a learner's
permit, actual driving experience, written testing and on- road testing by
the MVD.
MVD oversees Traffic Survival School ( TSS) programs by certi fyi ng
instruction courses, teachers and by assigning mu1 tiple violators to the
schools. Usually, a driver is assigned to TSS upon the accumulation of
eight points in a twelve month period. Points are given to each violation,
with two for minor moving violations, such as failure to yield, three for
serious violations including speeding and six or eight points for major
violations like drag racing, DUI's, or leaving the scene of an accident.
The TSS training is given under strict guidelines as to course content and
methods of presentation.
Diluting this program, however, is the assignment by courts to
citation diversion schools. Attendance at these schools usually expunges
the ticket, so no record of violations is kept by MVD. Because no record
exists, it is possible to go to several schools in various cities, and, in
fact, one city will assign a person to a diversion school no matter how
many tickets he o r she might have. While there may be some educational
value in attending these schools, there is no standard curriculum and very
l i t t l e is done to assure the quality of content or instruction. Therefore,
i t is possible that before the f i r s t citation is recorded with MVD, a
person could have had three or more serious violations. H. B. 2615,
introduced in the Legislature this year, will attempt to address this
problem by regulating the courses, the instructors and the number of times
a diversion school may be attended before points are assessed. The Study
Commission has already gone on record as favoring this legislation in a
l e t t e r sent to House and Senate leadership early in February.
Drunk Driving
The drunk driver i s a distinct threat t o t r a f f i c safety. In recent
years, the 1 egis1 ature has become increasingly tougher on these drivers,
enacting laws designed to quickly administrate civil penal t i e s such as
license suspension.
One of the laws i s Admin Per Se ( administrative i n i t s e l f ) .
Introduced in the 1987 Legislative session, the statute requires law
enforcement officers to take the driver license on the spot from a person
arrested for driving under the influence of alcohol ( D U I ) . An order of
suspension and a temporary, 15 day license is issued t o the driver at that
time. The driver license is sent t o the Motor Vehicle Division within five
days. A request form i s also given to the driver, who may apply for a
hearing on the suspension within 15 days. If no hearing is requested, the
suspension will take effect after the 15th day. About 25% of drivers
suspended during 1988 asked for hearings.
The statute, which became effective January 1, 1988, placed additional
power and paperwork in the hands of law enforcement officers. In preparing
for the Act's implementation MVD designed and produced an affidavit which
would incorporate all the necessary information and forms needed for
officers to make DUI arrests and suspend driver licenses. The intent was
to make it as easy as possible for officers to invoke the suspension.
An earlier law, called Imp1 ied Consent, was passed in 1983. Applying
for and accepting the privilege to drive a vehicle in Arizona, the 1 icense
gives consent to testing for blood alcohol concentration if arrested for
drunk driving. If the driver refuses to take or fails to complete the
test, hVD suspends the driver license for one year.
Before Admin Per Se, if the driver completed the test and was found to
have a blood alcohol concentration ( BAC) of .10 or higher the case was sent
to court for arraignment and trial. The 1 icense was not suspended until a
conviction was handed down and MVD ordered to suspend the 1 icense. This
often took months, while the person continued to drive and frequently
commit additional violations or even have fatal accidents.
Admin Per Se was intended to get this driver o f f the road as soon as
possible, and it appears to be working. After one year in effect,
statistics show that 21,796 drivers were suspended who would still be
driving without the new law. ( See Tables VI. l and V I . 2 ) .
Table VI. l
28- 692 ( Court Ordered)
28- 691 ( Implied Consent - MVD)
28- 694 ( Admin Per Se - MVD)
Total Number of A1 coho1 - Re1 ated Suspensions
1988 - December 31
Affidavits Received
Voided
Val id Affadavi ts
Dismissed Hearings
In System
* 7,691 Hearings He1 d
Suspension by MVD 21,796 APS
5,258 IC
Total Suspensions
" Equals 93% of Affidavits Received
Left in System December 31
January
February
March
Apr i 1
May
June
July
August
September
October
November
December
Total
* I988 Data is Preliminary
Table V1.2
Alcohol - Re1 ated Accidents
SOURCE: Traffic Studies Branch
Traffic Records Unit
VII. Recommendation I: Defensive Driving Schools
The Study Commission on Private Passenger Automobile Insurance
recognizes that any reasoned consideration of escalating insurance rates
must include some attention to selected traffic safety issues. One of the
topics that has come to the attention of the Study Commission is the
apparent abuse of the defensive driving school option by those charged with
traffic violations,
Briefly, our concern has been with allegations that there is currently
no real over; ight of defensive driving schools in Arizona; that, because of
a 1 ack of coordination among 1 ocal jurisdictions, individual drivers could
have multiple and serious traffic citations excused by different
jurisdictions at the same time; and that the current situation makes it
very difficult for the State of Arizona to identify those drivers who
should receive substantial remedial training or should be denied the right
to drive.
We have reviewed a draft of a bill that has been written by
representatives of the Arizona Supreme Court and ADOT's Motor Vehicl e
Division. The Study Commission be1 ieves that this legislation-- which will
call for the setting of minimum qualifications for instructors and course
content, certification of these schools by the Motor Vehicle Division, and
the development of an automated data management system to keep track of
those attending these school s-- will address most o f the abuses currently
associated with the use of the defensive driving schools.
The Study Commission does urge that this proposal be amended to state
that an individual is permitted use of this alternative to normal
processing of a traffic citation only once every five years.
VIII. Recomnendation: No- Fault Insaurance
The unanimous sense of the Study Commission members present and voting
is that no- fault insurance offers promise of real cost savings in the
provision and consumption of automobile insurance. At this time, not all
members of the Study Commission are confident of the magnitude of the
savings which would be realized, but we all do believe that such structural
change in the way insurance is provided to the consuming public will
be required to achieve long term savings in the cost of insurance.
It is clear that a variety of no- fault systems exist among the states
that have gone to this type of insurance program. It is also clear that
certain factors must exist in a no- fault system if it is to achieve the
cost savings which we all seek:
1. To preserve the sovereignty of individual choice-- as
we1 1 as avoid probable constitutional chal lenge-- the
Study Commission endorses the concept of an optional no-fault
system;
2. This system must include a strong verbal, not monetary,
threshold ( that requires injuries to be both serious and
permanent) beyond which the right to sue can be employed;
3. Cost savings will be proportional to both threshold that
is adopted and the level of benefits which are offered;
It is important to understand this recommendation in the context of
the interim report in which it is offered. There are other possible
strategies that may achieve cost savings. But among those strategies
reviewed by the Study Commission to this point, no- fault insurance is the
one alternative which does appear to offer real savings in both the
administration of an insurance program and in the cost of this product to
the consumer. The conditioned recommendation offered in support of no-
fault at this time is simply a product of the developing empirical base the
Study Commission has earnestly sought for each of the policy alternatives
we have examined. As additional material is reviewed by the Study
Cornrni ssion, we shall provide further comment about the estimated size of
cost savings, among other topics.
BIBLIOGRAPHY OF EXHIBITS/ REPORTS/ LAUS
SUBMITTED BY THE
ARIZONA DEPARTMENT OF INSURANCE
TO THE
STUDY COHMISSION
ON
PRIVATE PASSENGER AUTOMOBILE INSURANCE
1. P u b l i c p o l i c y s t a t e m e n t ( 10/ 13/ 88 Handout; Tab I ) .
2. Legal context i n which c u r r e n t p o l i c y is based ( 10/ 13/ 88 Handout;
Tab 11).
" Recap of rate law
" A r t i c l e 4 . 1 , Chapter 2 , T i t l e 20
3. Glossary of i n s u r a n c e t e r m s ( 10/ 13/ 88 Handout; Tab 111).
4. Current s t a t u s of r a t e s i n Arizona ( 10/ 13/ 88 Handout; Tab I V ) .
" Rate v e r s u s p r i c e
" Premium comparison
" B e s t ' s s t a t e r a n k i n g
" Arizona b r i e f i n g s h e e t
" 1983 - 1988 r a t e r e v i s i o n s of t o p t h r e e Arizona i n s u r e r s
" Premium i n c r e a s e s compared t o CPI
" 1982 - 1987 premium/ loss experience of t o p t h r e e Arizona
i n s u r e r s
5. E x h i b i t showing how many states have mandatory a u t o i n s u r a n c e
and/ or no f a u l t i n s u r a n c e and t h e i r average automobile premium
( 11/ 4/ 88 Handout; Tab A).
6. Copy and summary of any l a w s p r o h i b i t i n g o r l i m i t i n g t e r r i t o r i a l
o r zone r a t i n g and d e f i n i t i o n of " r e d l i n i n g " ( 1 1 / 4 / 8 8 Handout;
Tab B ) .
7. E x h i b i t showing t h e l o s s e s and expenses of t h e t o p t e n i n s u r e r s
i n Arizona ( 11/ 4/ 88 Handout; Tab C ) .
8. Charts akin t o t h o s e a l r e a d y prepared f o r Farmers, S t a t e Farm,
and A l l s t a t e f o r i n s u r e r s having t h e h i g h e s t p r i c e on t h e 1988
a u t o premium c o m p a r i s o n a n d f o r t h e t o t a l i n d u s t r y i n A r i z o n a
( 11/ 4/ 88 Handout; Tabs Dl E, F, and G ) .
9 . " Performance Audit, Department o f T r a n s p o r t a t i o n , Mandatory Motor
Vehicle Insurance Program," r e p o r t t o t h e Arizona l e g i s l a t u r e by
the Auditor General, September 1987, 87- 7 ( 1 1 / 4 / 8 8 Handout;
Tab H ) .
1 0 . E x h i b i t showing how u n i n s u r e d m o t o r i s t r a t e s have i n c r e a s e d
( 1 1 / 4 / 8 8 Handout; Tab I ) .
E x h i b i t showing what element o r combination t h e r e o f is d r i v i n g up
c l a i m s ' c o s t s by s u b l i n e ( work i n p r o g r e s s ) ( 11/ 4/ 88 Handout;
Tab J )
E x h i b i t showing how a u t o r e p a i r , a t t o r n e y f e e s , and medical c o s t s
a r e i n c r e a s i n g ( work i n p r o g r e s s ) ( Untabbed).
E x h i b i t showing p r i v a t e passenger a u t o m o b i l e e a r n e d premiums,
i n c u r r e d l o s s e s and margins ( Arizona) ( 1 / 2 0 / 8 9 Handout; Tab K ) .
E x h i b i t showing p r i v a t e passenger a u t o m o b i l e e a r n e d premiums,
i n c u r r e d l o s s e s and m a r g i n s ( c o u n t r y w i d e ) ( 1/ 20/ 89 Handout;
Tab L ) .
E x h i b i t showing 1981 and 1987 d i s t r i b u t i o n of p r i v a t e p a s s e n g e r
a u t o m o b i l e o u t g o f o r t h e t o p t e n A r i z o n a companies ( 1 / 2 0 / 8 9
Handout; Tab M ) .
E x h i b i t showing automobile maintenance and r e p a i r component and
a u t o m o b i l e bodywork component of t h e U. S. CPI compared t o t h e
U. S. CPI- A11 I t e m s ( 1/ 20/ 89 Handout; Tab N ) .
E x h i b i t showing automobile maintenance and r e p a i r component and
automobile bodywork component of the Phoenix area CPI compared t o
t h e Phoenix a r e a - A l l I t e m s ( 1/ 20/ 89 Handout; Tab 0 ) .
E x h i b i t showing Arizona s e m i - p r i v a t e h o s p i t a l room r a t e s v e r s u s
t h e Phoenix and U. S. consumer p r i c e i n d i c e s ( 1/ 20/ 89 Handout;
Tab P ) .
Photocopy of " An E m p i r i c a l I n v e s t i g a t i o n of t h e Costs of Adopting
Nofault I n s u r a n c e Systems: 1971 - 1980" by Joseph F. Johnson,
George B. F l a n i g a n , and James K. Weeks ( e x t r a c t e d f r o m t h e
J o u r n a l of I n s u r a n c e R e g u l a t i o n , December 1983) ( 1/ 20/ 89 Handout;
Tab Q ) .
Photocopy of " Comment: T h e C o s t of No- Fault'' by George B.
Flanigan, James K. Weeks, and Joseph E. Johnson ( e x t r a c t e d from
t h e - J- o u r n a l o f I n s u r a n c e R e g u l a t i o n , December 1983) ( 1 / 2 0 / 8 9
Handout; Tab R )
Photocopy of " Nofault: A Review of its Cost" by Claude C. L i l l y ,
I11 a n d B e r n a r d L . Webb ( e x t r a c t e d f r o m t h e
J o u r n a l of I n s u r a n c e R e g u l a t i o n , December 1983 ( 1/ 20/ 89 Handoct;
Tab S ) .
Photocopy of " The Cost of No- Fault: A Methodological Note" by
Robert S. Lawson, Gregory W. H e i d r i c h , and Lawrence W. S o u l a r
( e x t r a c t e d from t h e J o u r n a l of Insurance R e q u l a t i o n , March 1985
( ? / 3 / 8 9 Handout; Tab T).
P h o t o c o p y o f " N o - f a u l t : I s Modeling t h e Answer?" by C l a u d e C.
Lilly, I11 and Bernard L. Webb ( e x t r a c t e d from t h e - J- o- u- r- n- a- l- - o- f
I n s u r a n c e R e g u l a t i o n , March 1985) ( 2 / 3 / 8 9 Handout; Tab U).
Photocopy of " No- fault I n s u r a n c e A f t e r Three Years" - a Report to
t h e Governor p u b l i s h e d by t h e I n s u r a n c e Bureau, Michigan
Department of Commerce, October 6 , 1976 ( 2 / 3 / 8 9 Handout; Tab V ) .
Photocopy of " No- fault Insurance i n Michigan: ' Consumer A t t i t u d e s
a n d P e r f o r m a n c e " - a R e p o r t t o t h e Governor p u b l i s h e d by t h e
I n s u r a n c e B u r e a u , M i c h i g a n D e p a r t m e n t of Commerce, A p r i l 10,
1978 ( 2/ 3/ 89 Handout; Tab W ) .
Photocopy of " Report t o C o n g r e s s on t h e E f f e c t s of t h e 65 mph
Speed L i m i t During 1987," January 1989, p u b l i s h e d by t h e N a t i o n a l
Highway T r a f f i c S a f e t y A d m i n i s t r a t i o n , U. S. D e p a r t m e n t of
T r a n s p o r t a t i o n ( c o n t a i n s c o m p a r i s o n s of A r i z o n a w i t h o t h e r
states) ( 2 / 3 / 8 9 Handout; Tab 1).
Photocopy of Arizona Department of Public S a f e t y , Highway P a t r o l
Bureau p u k l i c a t i o n " I m p a c t of t h e 65 mph Speed L i m i t " ( 2! 3! 59
Handout; Tab 2 ) .
E x h i b i t showing a c c i d e n t comparisons on r u r a l i n t e r s t a t e highways
f o r t h e p e r i o d A p r i l 15, 1986 through December 31, 1988 produced
by t h e A r i z o n a D e p a r t m e n t of P u b l i c S a f e t y , Highway P a t r o l
Bureau ( 2 / 3 / 8 9 Handout; Tab 3 ) .
Photocopy o f t h e A r i z o n a T r a f f i c A c c i d e n t Summary - 1987
( p r i n t e r ' s p r o o f s ) p u b l i s h e d by t h e A r i z o n a D e p a r t m e n t of
T r a n s p o r t a t i o n ( 2/ 3/ 89 Handout; Tab 4 ) .
P h o t o c o ~ v of " How No- fault Auto Insurance Works - I f W e Let I t " & A
( e x t r a c t e d from t h e J o u r n a l of American I n s u r a n c e , t h i r d q u a r t e r
1988 ( 2/ 10/ 89 Handout; Tab 5 ) .
Photocopy of " No- fault: H a s t h e Performance M e t t h e Promise?" by
John D. R e i e r s e n , CFE, CPCU, A s s i s t a n t C h i e f , P r o p e r t y and
C a s u a l t y I n s u r a n c e , S t a t e of New York I n s u r a n c e D e p a r t m e n t
( e x t r a c t e d from - T- h- e-- - B u l l e t i n , S t a t e of N e w York I n s u r a x l c e
Department, March 1985) ( 2/ 10/ 89 Handout; Tab 6 ) .
Photocopy of " L i t i g a t i o n of C a t a s t r o p h i c In j u r y Cases i n t h e No-f
a u l t ~ ; a : The - ~ e w York E x p e r i e n c e " by Neal A. G o l d b e r g
( e x t r a c t e d f r o m t h e - A r b i t r a t i o n J o- u- r- n a l , M a r c h 1 9 8 5 ( 2 / 1 0 / 8 9
Handout; Tab 7).
Photocopy of " Why You Pay More Than t h e Next Guy" by P e t e r D.
Lawrence ( e x t r a c t e d from Esquire, August 1988) ( 2/ 10/ 89 Handout;
Tab 8 ) .
Photocouv o f " T r o u b l e d T i m e s F o r Mass. Auto I n s u r e r s " by N e i l * .
McGhee ( e x t r a c t e d from t h e - N- a- t- i- o - n a- l- - U - n- d e- r- w- r- i- t- e- r , P r o p e r t y &
C a s u a l t y e d i t i o n , June 13, 1988) ( 2/ 10/ 89 Handout; Tab 9 ).
Photocopy of " S e l l i n g No- fault Auto Insurance" by P e t e r P a s s e l l
( e x t r a c t e d from The New- York Tim-- e s, November 23, 1988) ( 2/ 10/ 8O
Handout; Tab 10).
3 6 . P h o t o c o p y o f " F a c t o r s A f f e c t i n g Urban A u t o I n s u r a n c e C o s t s , '
Decerrber 1988, p u b l i s h e d by I n s u r a n c e Services O f f i c e , I n c . ant
N a t i o n a l r \ s s o c i a t i o n of I n d e p e n d e n t Insurers ( 2 / 1 7 / 8 9 H a n d o u t ;
Tab 11).
Study Commission on Private Passenger
Automobi 1 e Insurance
Support and Opposition for
Sections of the Report
Recommendation
Present & Voting I I1 111 IV V VI 1 2
Wi l son
Carson
Kennedy
Mills
Gal 1 i nger
Hurl but
Garrett
Hair
Monie
Zuccaro
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
NO YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
NOSE: Bl ank indicates absent and not voting
Member Present and Abstaining
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DeLong YES
Members Absent
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corpstei n
Hi guera YES
Pri ns YES
NOTE: Members Mills, DeLong, and Corpstein were appointed to the Study
Commission after the convening of the 1989 legislative session.
Representative Mill's appointment came early enough to permit her to
actively participate in the del i berations of the Commission. Senator
DeLong has been able to attend the Commission's most recent meetings but
Senator Corpstein has not.

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AN INTERIM REPORT OF THE STUDY COMMISSION ON PRIVATE
PASSENGER AUTOMOBILE INSURANCE
Submitted to Governor Rose Mofford,
President Robert Usdane, and Speaker Jane Hull
Study Commission on Private Passenger
Automobile Insurance
Dr. L. A. Wilson 11, Chairman
Senator Pete Corpstein
Senator Bill DeLong
Senator Jesus Higuera
Representative Dave Carson
Representative Sandra Kennedy
Representative Karen Mills
Ms. Susan Gallinger
Mr. Lee A. Prins
Mr. David Hurlbut
Mr. Kirby Garrett
Mr. Lanny Hair
Mr. Bill Monie
Mr. Lou Zuccaro
March 8, 1989
Table of Contents
I1 . Assessing the Competitiveness of the Insurance
MarketinArizona . . . . . . . . . . . . . . . . . . . . . . . 9
IV . Examination of Reasons for Rising Costs of Private
Passenger Auto Insurance . . . . . . . . . . . . . . . . . . . 22
V . No- Fault Insurance . . . . . . . . . . . . . . . . . . . . . . 27
VI . Traffic Safety Issues . . . . . . . . . . . . . . . . . . . . 32
VII . Recommendation I: Defensive Driving Schools . . . . . . . . 39
VIII . Recommendation 11: No. Fault . . . . . . . . . . . . . . . . 40
IX . Bibliography of Exhibits/ Reports/ Laws . . . . . . . . . . . . 42
X . Votes of Commission Members . . . . . . . . . . . . . . . . . . 46
I. Introduct ion
The Study Commission on Private Passenger Automobile Insurance was
created by House Bill 2021 during the 1988 legislative session. As
outlined in this legislation, the Study Commission is to achieve the
following objectives:
1. To review private passenger automobile insurance rates,
trends, and reasons for escalating rates.
2. To compare the private passenger automobile insurance
rates with the rates of other states.
3. To examine various rating systems, including prior
approval of rates and competitive rating, as well as the
impact of such systems on the affordability and
availability of auto insurance.
4. To examine the administrative costs and manpower
requirements of the Department of Insurance in
connections with the administration of various rating
systems.
5. To examine alternative systems - for payment of auto
insurance claims and whether such systems can have a
positive impact on auto insurance rates.
6. To examine other aspects of the auto insurance system to
determine if other changes should be implemented to
promote avai 1 abil i ty and affordabi 1 i ty of auto
insurance.
7 . To make recommendations regarding its findings.
The Study Commission, according to this legislation, is to prepare and
submit a report to the Legislature and the Governor no later than December
Since the passage of House Bill 2021, a number of events-- most notably
the passage of Proposition 103 in California-- have brought the issue of the
regulation of the private passenger automobile insurance industry to the
top of the public agenda. If the Study Commission is to have a meaningful
role in the current discussion of pub1 ic pol icy regarding automobile
insurance in Arizona, it is clear that an interim report must be submitted.
While the Study Commission understands the need to submit an interim.
report, we are committed to the continuation of the work of the Commission
and intend to issue a final re~ ort in December of this year.
In order to facilitate the drafting of the Interim Report, the
following ground rules were adopted:
1. Individual members of the Study Commission were given
reponsibility for drafting portions of the report.
2. Individual members of the Commission were asked to
ground their comments in the research materials that
have been brought forward to the Commission.
3. Specul ation about the constitutional i ty or pol i tical
feasibility of specific suggestions was to be avoided.
The test that was used was that of " reasonableness,"
recognizing that reasonable men and women frequently
disagree about the constitutionality or political
feasibility of specific policy recommendations.
4. The Interim Report was to be organized by sections and
individual members of the Commission were to be given an
opportunity to vote on individual sections of the
report. Votes of individual members were to be
recorded.
While it is obvious that individual members of the Commission possess
sometimes strongly held personal opinions about the proper role of
government in the regulation of the insurance market, the Study Commission
has held itself to a standard which demands that an empirical base support
expressions of preference. In attempting to meet t h i s standard, the Study
Commission has sought t o review the empirical 1 i t e r a t u r e related to each of
the questions brought before i t and the Interim Report seeks to convey what
the Study Commission has found t o t h i s point.
The Price of Automobile Insurance In Arizona
In 1986, the average private passenger automobile insurance premium in
Arizona was reported t o be $ 553.84, a figure which ranked Arizona f i f t h in
the nation in terms of the cost of such insurance. The 1987 average cost of
$ 601.96 caused Arizona t o be ranked as having t h e f o u r t h most expensive
automobile insurance premium in the nation.
Subsequently, A. M. Best-- the private reporting service compiling t h i s
information-- was taken t o task by o f f i c i a l s in Arizona f o r f a i l i n g t o
properly estimate the number of private passenger automobiles in Arizona.
In p a r t i c u l a r , pick- up trucks are excluded from the calculation of the base
used in computing the average cost by A. M. Best. Arizona apparently has one
of the highest number of such vehicles, on a per capita basis, in the nation
and these vehicles figure prominently in private passenger transportation
( as compared t o e i t h e r farm or commercial use). I f the suggestions for
a l t e r a t i o n i n the base were accepted by Best, i t i s argued t h a t Arizona
would rank somewhere between 14th and 16th in average premium cost.
Regardless of where Arizona ranks nationally in terms of policy c o s t ,
i t i s c l e a r l y and unarguably the case t h a t insurance premiums have increased
a t an alarming r a t e during the past decade. A. M. Best estimates t h a t
average premiums in Arizona have increased by 99.63% between 1982 and 1987.
A survey undertaken by the Arizona Department of Insurance on behalf of the
Study Commission provides some insight into the increases which have been
experienced by selected types of premiums. The data presented in Table I. 1
represents the median values of different types of premiums from 1980
through 1987.
TABLE 1.1
Cost of Different Types of Automobile Premiums
1980 - 1987
Median Values for A1 1 Companies
Type of Premium 1980 1981 1982 1983 1984 1985 1986 1987
Bodily Injury $ 106 $ 104 $ 149
0% - 2% 41%
Property Damage $ 55 $ 64 $ 69
0% 16% 25%
Medical Payment $ 19 $ 20 $ 22
0% 5% 16%
Comprehensive $ 52 $ 57 $ 58
0% 10% 12%
Collision $ 100 $ 110 $ 121
0% 10%. 21%
Uninsured
Underinsured $ 5 $ 5 $ 7 $ 9 $ 11 $ 12 $ 14 $ 19
0% 0% 40% 80% 120% 140% 180% 280%
Percentages are based upon change in the premium from the value of the
premium in 1980.
In coming to an appreciation of these increases, it is useful to cast
them in terms of the context in which these premiums are assessed. Using
the same 1980- 1987 period, Table I .2 contains various information deal ing
with estimated population growth, numbers of drivers, accidents and the
like.
TABLE I .2
Changes in Selected Characteristics of the Insurance
Confext in Arizona: 1980- 1987
Characteristic 1980 1987 % Change
Popul at i on
Licensed Drivers
Passenger Vehicle
Registrations
Miles Driven
Accidents
Injuries
Fatalities
Semi- private Hospital
Room Charge
Motor Vehicle Theft Rate
SOURCE: Statistical Abstract of the United States; ADOT, Traffic Records
Unit; A. M. Best; Health Insurance Association of America, " Survey of
Hospital Semi - Private Room Charges" ; FBI Uni form Crime Reports rate per
100,000.
On April 15, 1987, Arizona increased the maximum speed 1 imit on i t s
rural i n t e r s t a t e highways to 65 mph. The Arizona Department of Public
Safety
Table 1.3
Estimated Impact of 65 MPH Speed Limit
% Change
Type of Accident April ' 87 - April ' 88
- - - - --
Urban Rural
All accidents t .75% + 9.76%
Non- injury accidents t 3.30% + 3.00%
Injury accidents - 5.51% + 20.20%
Fatal accidents - 48.00% t37.23%
SOURCE: " Impact of the 65 MPH Speed Limit," Arizona
Department of Public Safety, Highway Patrol Bureau.
The c l e a r implication of these data i s t h a t the 65 MPH speed l i m i t i s
associated w i t h a substantial increase in t r a f f i c i n j u r i e s and f a t a l i t i e s - -
an increase which contradicts a general trend toward reduced i n j u r i e s and
f a t a l i t i e s observed for those driving s i t u a t i o n s in which the 55 MPH speed
l i m i t s t i l l prevails.
Requl a t i on
Insurance r a t e regulation in Arizona i s governed by T i t l e 20 of the
Arizona Revised S t a t u t e s . Chapter 2, A r t i c l e 4.1 of T i t l e 20, commonly
referred t o as Arizona's " Use and File" law, c r e a t e s t h e legal framework
within which the Department of Insurance must conduct i t s r a t e reviews and
make decisions about rate filings. Under this statute, every authorized
insurer and rate organization must file all rates and supplementary rate
information within 30 days after the rates become effective. Insurers do
not have to receive the Director's approval and may use the rates unless
the Director disapproves them. If the Department believes that one of the
rate making standards has been violated, an order must be issued to
disapprove the rates. The order does not affect any policy issued prior to
the effective date of the order ( ARS 20- 388); and, the order is not
effective until 30 days after it is issued. Any insurer or rate
organization disagreeing with the Director's order may request a hearing
and seek judicial review which stays the order ( ARS 20- 396). The rate
making standards require that an insurer shall not charge rates that are
excessive, inadequate or unfairly discriminatory ( ARS 20- 383). In
particular, the " excessive" standard is keyed to competition.
Rates are presumed not to be excessive if a reasonable
degree of price competition exists . . . with respect to
a particular class of business . . . A competitive
market is presumed to exist, unless the Director, after
a hearing, determines that a reasonable degree of price
competition does not exist in the market . . .( emphasis
added, ARS 20- 383.8)
If, after a hearing, the Director finds competition doesn't exist, the
Director may prescribe by order a permissible percentage increase in a
particular class of business. The order expires one year after its
effective date.
The Director could also order that rates be filed 30 days before their
effective date if the Director finds after a hearing that a noncompetitive
market exists ( ARS 20- 385.0). The order would remain in effect until the
Director determines that a competitive market has been restored.
Finally, the validity of rates is not statutorily limited by time.
Consequently, rates do not have to be renewed. The Department of Insurance
does not currently have the authority to require an insurer to periodically
refile its rates, once those rates have been successfully introduced.
11. Assessing the Competitiveness of the
Insurance Market in Arizona
The existence of real competition is critical to the efficient
functioning of an unregulated insurance market. In Arizona, insurance
rates cannot be found to be " excessive" under current law if a " reasonable
degree of price competition" is found to exist in the insurance market ( ARS
20- 383. B).
In examining the vitality of the Arizona insurance market, a variety
of indicators should be addressed. Those who study markets generally agree
that highly competitive markets are characterized by:
1. slightly differentiated products that are close
substitutes;
2. a sufficiently large number of producers each providing a
small enough proportion of the industry's output so that
no single firm or small group of firms has signficant
market power; and
3. the absence of economically significant barriers to entry
and exit.
These criteria for assessment of the presence or absence of competition are
fairly reflected in ARS 20- 383( B). In addition, state law in Arizona
includes " rate differentials in a particular class of business ( ARS 20-
383( B)" as an indicator of competition in the insurance industry.
Price differenti a1 s may be particularly useful in addressing the
question of collusion in the setting of insurance rates in Arizona. That
is, given the presence of a private rating bureau ( ISO), one critical
perspective might argue that all-- or at least a subset of companies-- would
offer the same price for their product. The annual survey conducted by the
Department of Insurance clearly indicates that, for the hypothesized
" typical" consumer, a wide variation in premiums exits in Arizona. For
instance, in a report released February 18, 1988 reported six month
premiums for a specific hypothetical consumer that ranged between a low of
$ 354.81 and $ 1,053.00 for a resident of Phoenix and $ 300.88 and $ 547.00 for
a resident of Tucson. In a recent survey of the top automobile insurers in
Arizona ( having a combined market share of 55.8%), the Department of
Insurance attempted to develop insurance quotations based upon a variety of
hypotheticals. The difference in price between the highest and lowest.
premium quote ranged from $ 260 to $ 470 for these different hypotheticals.
Quite clearly, the consumer should expect to find substantial differences
in the price of insurance when seeking quotes from different insurance
companies.
Examining the three criteria for the assessment of competition
out1 ined above, it is clear that there is relative ease of entry and exit
from the Arizona insurance market, An actual company's view of the ease of
entry into the Arizona insurance market will, of course, include an
assessment of the general legal or regulatory environment as well as
prevailing market conditions. However, the formal requirements for entry
into the Arizona insurance market-- out1 ined in ARS 20- 210 and generally
requiring $ 900,000 or $ 1,500,000 capital and surpl us funding, depending
upon the type of company that is writing automobile insurance-- are
considered to be about average when compared with the same requirements in
other states.
An example of the ease of entry to the Arizona market is found in the
experience of the American Family Insurance Company. Entering the market
in 1985, American Family achieved a 4.4% market share and ranked fourth
among all insurance companies doing business in Arizona in 1987.
The tests typically employed by economists to test the existence of
competition emphasize the market share of insurers. A test employed by the
U. S. Department of Justice to evaluate the competitive effects of mergers
and acquisitions is referred to as the Herfindahl- Hirschman Index. This is
the index that has been employed by Hofflander, Nye and Charlesworth ( AN
ECONOMIC ANALYSIS OF THE CALIFORNIA INSURANCE INITIATIVES, 1988) and the
General Accounting Office ( AUTO INSURANCE: STATE REGULATION AFFECTS COST
AND AVAILABILITY, 1986) in their respective assessments of the
competitiveness of the automobile insurance market. Hoffl ander, et. a1 . ,
provides an interesting benchmark against which the Arizona insurance
market can be compared. Taking data from A. M. Best relative to the Direct
Written Premiums for private passenger automobile liability insurance for
1981 through 1987, the Herfindahl- Hirschman Index has been computed for
each of these years for Arizona and these data are presented in Table 11.1.
The value for this index ranges from a high of 1080.6 ( 1981) to a low of
904.8 ( 1987). The U. S. Department of Justice classifies an industry as
highly concentrated if the Herfindahl- Hirschman Index has a . value greater
than 1800. Values of this index between 1000 and 1800 are defined as
moderately concentrated whi 1 e val ues fa1 1 i ng be1 ow 1000 are considered
unconcentrated ( Hofflander, Nye, and Charlesworth, 1988: 20). During the
course of these years, the Herfindahl- Hirschman Index began at a level
defined as moderately concentrated and has generally declined, indicating a
trend toward the Arizona insurance market becoming somewhat more
competitive.
Another perspective on the meaning of this index value is found in
comparing the values of the Herfindahl- Hirschman Index in Arizona with its
value in California and the U. S. as a whole. A comparison of these various
TABLE 11.1
Examining Issue of Industry Concentration through Use
of the Herfindahl- Hirschman Index and Market Shares:
Arizona, California, and the United States
Number of H- H Industry Concentration
Year Groups Index 4- Group 8- Group 20- Group
Arizona 1981 80
1982 79
1983 8 1
1984 8 0
1985 79
1986 7 8
1987 85
Cal i forni a 1981 144
1982 144
1983 152
1984 149
1985 146
1986 149
1987 N A
United States 1981 440
1982 446
1983 458
1984 456
1985 - 471
1986 458
1987 483
SOURCE: Arizona data taken from annual A. M. Best, BEST'S EXECUTIVE DATA
SERVICE for 1981 thru 1987. Data for California and the United States taken
from Hoffl ander, Nye and Char1 esworth ( 1988: 17- 18).
values indicates that California has a substantially more concentrated
insurance market than the United States as a whole and that Arizona is even
more concentrated than California.
Another measure of industry concentration is found in the proportion
of the total market that is captured by 4- Group, 8- Group, and 20- Group
companies. For instance, the national average in 1987 finds 40.4% of
premiums written by the t o p four companies. In California, 49.6% of the
premiums are written by the t o p four. For Arizona, the t o p four companies
write 53.5% of all automobile insurance premiums. Again, these data
indicate that Arizona's automobile insurance market is more concentrated
than either California or the national market.
The general trend in Arizona-- and in Cal i forni a-- i s toward greater
competition in the insurance market whether measured by the Herfindahl -
Hirschman Index or by 4, 8, and 20 group percentages. Interestingly, the
national data seem t o be at a lower general level of concentration b u t
heading in a direction toward less competition, when assessed by either of
these c r i t e r i a .
As noted earlier, ARS 20- 385( D) changes the " use and. f i l e " approval
standard to " prior approval" of the Director if the Director finds that the
marketplace i s noncompeti tive. The regulation further calls for this
provision t o remain in effect until the Director determines that a
competitive market has been restored.
Since 1980, whe'n=^ h' eu se and file" provision was adopted, no Director of
the Department of Insurance has declared the Arizona insurance market
noncornpeti tive. However, i t may be useful t o conceive of competition as a
continuous, rather than dichotomous, concept. That i s , the question should
be framed in terms of the magnitude or extent of competition in a market,
not i t s simple presence or absence.
Cast in these terms, one might acknowledge t h a t , compared with
n a t i o n a l and Cal i f o r n i a i n s u r a n c e m a r k e t s , t h e Arizona market could
reasonably be encouraged to become more competitive, without having to
conclude t h a t the Arizona insurance market i s " noncompetitive."
111. Prior Review
Until the 1960' s, most s t a t e s employed a " prior approval" system of
insurance rate regulation. Under these systems, insurance companies were
required to submit t h e i r proposed premiums to a s t a t e Department of
Insurance for review and approval. During the 1960' s, many s t a t e s moved
away from prior approval to a competitive rating model. Ironically, i t is
California that i s viewed as pioneering the competitive rating approach
following i t s adoption of t h i s l a t t e r approach in 1947. Arizona joined
t h i s general trend toward competitive rating following a 1979 Auditor
General's report in which i t was argued that:
I t appears that prior approval of insurance rates i n
Arizona i s not necessary and could be eliminated for all
but a few lines of insurance i f the s t a t e adopted a
competitive or " open competition" rating law and that by
so doing the approval of insurance r a t e s could be
accomplished more economically and e f f i c i e n t l y .
( PERFORMANCE AUDIT OF THE ARIZONA DEPARTMENT OF
INSURANCE, Office of the Auditor General, 1979, p. 44)
While analysts typically deal with s t a t e rating laws as i f there were
but two approaches-- relying upon e i t h e r market competition or p r i o r
approval-- there, in f a c t , are a wide variety of types of ways s t a t e s have
gone about " regulating" the insurance industry. In 1974, the National
Association of Insurance Commissioners ( NAIC) developed the fol 1 owing
c l a s s i f i c a t i o n of rating laws ( GAO, 1986: 82):
State- made rates: The s t a t e insurance department, in
consultation with insurance industry representatives,
promulgates the r a t e s t o which all insurers must adhere.
Mandatory bureau rates: All insurers operating in the
s t a t e must obtain membership in a rating bureau, which
seeks prior approval of a common bureau r a t e .
Prior approval laws: All insurers must f i l e thcir
proposed rates w i t h the s t a t e insurance department arid
provide data with these f i l i n g s to support the contention
t h a t the r a t e s are not " e x c e s s i v e , inadequate, or
unfairly discriminatory."
Modified prior approval laws: Insurers can revise rates
without prior approval i f based solely upon a change in
loss experience. However, rate revisions based upon
expense re1 at ionships or rate c l a s s i f i c a t i o n s are s t i l l
subject to prior approval.
Fi 1 e- and- use 1 aws ( bureau rates advisory only) : Rates
become e f f e c t i v e immediately upon f i l i n g , with no
a f f i r m a t i v e action of the insurance commi s s i o n e r
required. However, under f i 1 e- and- use 1 aws in states
that require adherence to bureau r a t e s , f i l i n g s made by a
rating organization on behalf of insurers must be adhered
to bv t h e i n s u r e r unless t h e i n s u r e r f i l e s f o r a
deviation.
File- and- use laws ( adherence to bureau rates required).
Use- and- file laws: Rates must be f i l e d within some
specified period of time AFTER being used in the s t a t e .
No f i l i n g laws: Insurers are not subject to any f i l i n g
requirements.
Since the development of this c l a s s i f i c a t i o n scheme, another form of prior
approval has been adopted by three s t a t e s and generally referred to as
"' Flex rating." In t h i s version of prior approval, insurers are permitted
a specified increase in rates ( typically defined in percentage terms)
without seeking prior approval from a Department of Insurance ( or other
regulatory agency). An a1 ternative to the percentage c r i t e r i o n , the flex
band may be tied to the local Consumer Price Index ( CPI) on insurance loss-relevant
items. If a proposed increase i s greater than t h e " f l e x band"
specified in the law, the insurer must seek the prior approval of the
regulatory authority.
? he intention o f the " f l e x rating" system, of course, is to balance an
interest in previewing rate increases ( as under a prior approval system)
with a desire to limit the cost of administering a regulatory policy ( as
under a market or competitive system) and, at the same time, achieve the
efficiencies expected of a sjstem which relies upon competition in the
marketplace. Unfortunately, the experience of other states with this
system is so new that no studies of the flex rating system are available
for review by the Study Commission and, consequently, flex rating is not
included in the analysis which follows.
For purposes of analysis, most researchers collapse the various
systems outlined by NAIC into those which are " competitive" and those which
rely upon regulation or are " noncompetive." Viewing the order of
presentation of the rating schemes as reflecting the amount autonomy-- from
low to high-- given insurers in the setting of rates, states with '' State
Made Rates" through " Modified Prior Approval " are considered
" noncompetitive." States with the remaining procedures are considered
" competi tive."
A number of empirical stgdies of the effect of prior approval upon
insurance premiums exist in the literature. The 1986 report by the U. S.
General Accounting Office ( AUTO INSURANCE: STATE REGULATION AFFECTS COST
AND AVAILABILITY, p. 23) conpared the experience of 20 states with
competitive rating systems with 24 slates with noncompetitive or prior
approval systems. Aggregating the data taken from 1975 through 1983, this
analysis finds the following:
Table 111.1
' 3mpetitive Noncompetitive
Z~ ting States Rating States
: 80 Observations) ( 216 Observations) Diff
Physical Damage:
Average Premiums $ 134.79 $ 143.20 $- 8,41*
Average Losses 88.93 96.86 - 7.93*
Premi ums/ Losses 1.53 1.49 .05*
Li abi 1 i ty:
Average Premiums 197.30 194.22 3.06
Average Losses 133.77 134.76 - 0.98
Premiums/ Losses 1,49 1.47 0.02
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* indicates s t a t i s t i c a l significance
For physical damage insurance, b o t h average premi um and average 1 oss are
higher in the noncompetitive or prior review s t a t e s . The r a t i o of premiums
to losses, however, were l o w ~ rin states with prior approval systems. All
three of these differences ? re s t a t i s t i c a l l y s i g n i f i c a n t . When one
examines the analysis of the data for l i a b i l i t y insurance, none of the
differences are s t a t i s t i c a l l y cignificant.
In an entirely d i f f e r e c h e t of analysis, Kenneth 3. Meier ( THE
POLITICAL ECONOMY OF REGULATISY: THE CASE OF INSURANCE, 156- 1571 notes
that regulation can d i s t o r t market prices in two ways. If regulation i s
sought by the regulated i n t i s t r y f o r i t s own b e n e f i t ( e . g . , George
S t i g l e r ' s theory of r e g u f a t i c - ) , prices in a regulated market should be
higher- On the other hand, - f a monopoly or near monopoly e x i s t s , the
introduction of regulation cc ; ld serve to reduce the a r t i f i c i a l l y high
monopoly prices. Meier argues that the structural c h a r a c t e r i s t i c s of the
insurance market do not esti-; rs those of a monopoly and, consequently, he
suggests t h a t regulation shol,- a serve to INCREASE t h e p r i c e of insurance.
In his comparison of s t a t e s with " competitive" and " noncompet i t, ivt." tea tt?
syst, ems, he argues t h a t :
In no c a s e a r e t h e r a t e s in r e g u l a t e d s t a t e s
s i g n i f i c a n t l y d i f f e r e n t from t h e r a t e s in l e s s regulated
s t a t e s , a f i n d i n g c o n s i s t e n t with the other empirical
1 i t e r a t u r e ( see Harri ngton, 1984). The c l e a r conclusion
i s t h a t r e g u l a t i o n , i n g e n e r a l , has no impact on the
p r i c e of insurance.
The GAO report noted above a l s o includes a comparison of competitive
and p r i o r approval s t a t e s broken down by whether the s t a t e uses a n o - f a i i l t
or t o r t l i a b i l i t y system and provides f u r t h e r i n s i g h t into t h i s i s s u e :
Table 111.2
No- Faul t Li abi 1 i t y S t a t e s
Competitive Noncompetitive
Rating S t a t e s Rating S t a t e s
( 87 Observations) ( 62 Observations) D ? f f
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Physical Damage:
Average Premiums $ 124.56 $ 141.36 $- 35.80*
Average Losses 82.06 96.84 - 14.78*
Premiums/ Losses 1.55 1.47 .07*
L i a b i l i t y :
Average Premiums 202.57
Average Losses 144.57
Premiums/ Losses 1.42
Table 111.3
Tort Liability States
Competitive Noncompetitive
Rating States Rating States
( 93 Observations) ( 154 Observations) Diff
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Physical Darna* ge:
Average Premiums $ 143.42 $ 143.94 $- 0.52
Average Losses 95.36 96.88 - 1.52
Premiums/ Losses 1.52 1.49 ' 03
Liability:
Average Premiums 192.37 180.29 12.07
Average Losses 123.67 120.94 2.93
Premiums/ Losses 1.56 1.51 0.05"
* indicates statistical significance
Iriterestingly, there are no differences in premiums or losses for
either physical damage or liability insurance tort states with competitive
or prior rev. iew rate setting procedures. The differences which are noted
bet~ een competitive and prior review systems are only found in no- fault
in; grance states. In this instance, significantly lower premium and lower
losses are noted for those states with competitive rate setting.
While most states have adopted one or another of the insurance rats
regulation strategies noted above, an additional alternative is found in an
excess profits tax which might be useful as one strategy by which to avoid
the apparent inefficiencies o f a prior approval system yet provide for the
systematic review of insurance rates with an eye toward ferreting out
instances of excessive rates. The three considerations which figure
promintently in an excess profits tax include:
1. underwriting income ( gain or loss);
2. Investment income ( gain or loss);
3. The period or cycle that is used i n calculating the
underwriting and investment income ( e. g., 5 or 6 years).
Like a flex rating system, some expectation of what constitutes 2.-
appropriate profit level must be decided upon but, whereas the flex rat, ir?
s. ystec; focuses upon the increase i n premium cost, the excess profs ts
criterion would specify the acceptable rate of return that could be claire:
by an insurance company.
IV. Examination c i Reasons for Rising Costs of
Private Paj: enger Auto Insurance
The evidence and testimony so far brought before our Commission have
stirfaced numerous " allegedn causes of the spiraling rates for auto
insurance ' n Arizona. These " a: legedn causes have been grouped into four
categories, i . e., Regulatory Deficiencies, Traffic Safety Deficiencies,
K i sing Cl ajms Costs, and Fraud,' Crime for purposes of discussion, even
though several of these categories overlap. The following is an outline of
these alleged causes along wi: h some of the evidence or explanatory
i n f o r m a t i o n brought forth in our review.
" Alleqed" Reasons for Hiqh Auto Insurance Rates
A. Regulatory Deficiencies
1. INSURERS ARE MAKIN; EXCESSIVE PROFITS
In support o f this thezis:
a. Average a u t ~ insurance rates have been estimated by
A. M. Best to have increased 106% in Arizona ir! the
period of 1581- 1987 -- the most, nationwide in that
peri od .
b. These averase increases have outpaced local Ccnsumer
Price Indices.
c. Arizona auto rates are also estimated by A. M. Best to
be the 4th wst expensive in the country, yet we have a
re1 at i vel y snal 1 popul at i on and don't have anywhere
near the 1e; rel of industrialization of many other
states with Yower rates.
d. Insurance cwpany stocks were reported to have been
selling at ' ncreased levels with generally higher
price: earn:? gs ratios in 1986 and 1987.
In Opposition to This ' 9esis:
a. The Arizona Department of Insurance's preliminary
reports ind'zated that between 1981 and 1987 Arizona
" earned pre-' urns" increased 237% industrywide while
incurred 1 G: ses outpaced those increases by spi )- a1 ing
up 255%.
b. While premium increases outpaced the increases i n local
Consumer Price Indices, they f e l l short o f the average
increases i n the components o f the indices t h a t r e l a t e
t o medical costs, body work and crash parts. For
example, Arizona's average semi- private hospital room
rate at $ 225 per day was almost twice that o f the
Countrywide average rate of about $ 120. I n fact,
Arizona's average hospital room charges jumped by over
114% between 1981- 1987 and d a i l y charges jumped by 40%
i n only the l a s t 3 years.
c. The size and level of i n d u s t r i a l i z a t i o n o f a state have
f a r less relevancy t o auto rates than do density o f
popul a t i on, number and adequacy o f roadways,
a v a i l a b i l i t y of public transport, average miles driven,
level o f t r a f f i c safety measures, etc.
d. A1 though many insurers' stock prices increased i n 1986
and 1987, t h i s was due t o severely depressed prices and
values previously, because o f the bottoming- out o f the
six- year property and casual t y underwriting cycle i n
1985.
e. The Insurance Commissioner o f the neighboring state o f
Ca1 i f o r n i a t e s t i f i e d before the Cal i f o r n i a l e g i s l a t u r e
and presented a Departmental study o f " Cornparat i ve
Returns on Average Net Worth Ratiosn indicating t h a t
p r o p e r t y and casualty i n s u r e r s ' f i v e year average
r e t u r n on net worth was 8.36% from 1983- 1987; whereas,
D i v e r s i f i e d Fi nanci a1 companies averaged 11.92% i n the
same period. The Commissioner summed t h i s up by saying
t h i s was " f a i r l y pedestrian."
f. The Hoffl ander, Nye, Charlesworth study and testimony
i n d i c a t e d t h a t p r o p e r t y and c a s u a l t y i n s u r e r s had
returns on equity 5.4% lower than comparable r i s k
investments i n the period o f 1981- 1987.
g. While acknowledging t h a t o u r a u t o r a t e s are
unacceptably high, the Arizona Department o f Insurance
has challenged A. M. Best's ranking o f us as t o having
the fourth highest auto rates. The Department o f
Insurance challenge that Best's calculations used the
proper number of vehicles registered, f a i l e d t o account
f o r the impact of the number of uninsured motorists and
nonresident motorists i n the state or t h a t our premiums
in cl ude mandated UM coverages, r ej ectabl e e ls ewhere i n
the country,
2. INSURERS ARE INEFFICIENT AS TO THFIK OWN ADMINISTRATIVE
EXPENSES.
I n Support o f This Thesis:
a. C h r i stopher Horphous o f Cal i f o r n i a ' s V o t e r Revol t
charged t h a t t h e p r o p e r t y and c a s u a l t y i n s u r a n c e
i n d u s t r y ' s administrative casts ( about 30%) should be
much c l o s e r to t h a t o f p u b l i c u t i l i t i e s ( about 6%).
b. Another witness couldn't understand why Blue Cross and
Blue Shield could r e t u r n almost 90% o f the premium
d o l l a r i n b e n e f i t s w h i l e auto insurers t y p i c a l l y only
r e t u r n about 70%.
I n Opposition t o This Thesis:
a. Beth Charlesworth pointed out t h a t the nature o f the
business o f a p u b l i c u t i l i t y was vary s u b s t ~ n t i v e i l y
d i f f e r e n t than t h a t o f an i n s u r e r and t h a t claims
hand1 i n g and law s u i t defense are v e r y expensive
m a t t e r s . Moreover, i n s u r e r s are s u b j e c t e d t o
marketing, sales commission and a d v e r t i s i n g expenses
n o t experienced by u t i l i t i e s , which f u n c t i o n as
monopol i es.
b. Insurance company o f f i c i a l s also t e s t i f i e d t h a t Blue
Cross and Blue Shield were f i r s t party c a r r i e r s n o t
f a c i n g the expenses o f l i a b i l i t y claims a d j u s t i n g and
law s u i t defense, indigenous t o l i a b i l i t y insurance.
3. INSURERS ARE COLLUDING, CAUSING A FAILURE OF COMPETiTION I N
THE MARKET PLACE
NOTE: This a l l e g a t i o n i s covered i n d e t a i l i n Part I 1 o f
t h i s r e p o r t concerning " Issues Surrounding the Existence o f
a Market."
4. INSURERS AREN'T REGULATED ENOUGH EITHER BY GOVERNMENT OR
MARKET FORCES
NOTE: This a l l e g a t i o n i s covered i n d e t a i l i n Part 111 o f
t h i s r e p o r t concerning " Issues Surrounding the Role o f
Regulation i n the Management o f the Insurance Market."
B, TRAFFIC SAFETY DEFICIENCIES
The Arizona Department o f Insurance reports the numbers ( frequency) of
accidents and i n j u r i e s are increasing i n Arizona at about twice the r a t e of
t h a t o f the courrtr- ywide average, i . e . , 3.98% per year versus 1.93% per
year. Some o f the more important arguments presented indicate these
1. Growing populations and increasing miles driven. For
example, from 1981- 1987 Arizona's popul at ion grew by 18%,
the number o f miles driven grew by 36% and the number uf
accidents i~ corded grew by 37%.
2. Increasing traffic density on clogged, insufficient and
deteriorating roadways.
3. The failure of traffic safety measures and lax enforcenent
related to:
a. Driving and substance abuse;
b. Increased speed and speed limits;
c . Failure of seat belt usage;
d. Failure of vehicle safety maintenance;
e. Insufficient left turn controls and the " right on red"
rul e .
f. Misuse of the violation expungement rule for multiple
offenders;
g. Failure of enforcement of rules against uninsured
motorists.
C. RISING CLAIM COSTS
The ~ s s ntiu de ( severity) of claim costs is increasing.
1. The Arizona Department of Insurance reports that the average
bodily injury claim cost in Arizona is rising at about 8.82%
a year; and, at $ 8,000 per case in 1987, was almost 13% per
case higher than the countrywide average.
2 . The Arizona Department of Insurance reports that the average
property damage claim cost in Arizona is increasing at about
9.29% a year; and, at $ 1,315, was 6% per case higher than
the Countrywide average.
The magnitude : f case value . and the rturnbe~ o f c a s e s
contested are be- ; eved to have grown also because o f :
a. Broadened c; verages and liability exposures, arisirq
legis'lative'j and judicially ( e. g., adoption of the
doctrine of pure comparative negligence; coverage
stacking; rke doctrine of " reasonable expectations,"
higher coverage 1 imi ts; etc. . . . ) ;
b. Narrowed cz~ erage exclusions and liability defenses,
arising legislatively and judicially; ( e . g . ,
eliminatior: of liability and uninsured motorist
coverage er: lusions; abrogation o f intra- family and
inter- spousrl immunities, as well as t h e g u e s t
statutes, e: c. ...);
c. Higher award; by more sympathetic juries;
d. The 3: 1, 4:; or even 5: 1 multiplier used to determine
the value c j i "' pain and suffering" damages relative to
medical and ' ost wages damages;
e. Greater awareness and acceptance of the ability to sue
and win large awards;
f. The ease of funding such suits via the attorney's
contingency fee system;
g. The increasjng number of attorneys available for
representiri? peopl e; and, the pub1 icts increased
awareness, o f attorney availability via now permitted
attorney adverti sing . In fact, AIRAC research data
indicates attorney representation in Arizona bodily
injury cases rose from 25.5% in 1977 to 43.8% in 1Y87.
( No data have ye? been gathered by the Com% ission in these
areas. )
a. Claimant fraut - staged accidents
b. Claimant fraud - exaggerated injuries
6 , Vehicle t h e f t
V . No- Fault Automobile Insura~ ce
Tile increasing cost of automobile insurance has caused renewed
interest in the concept of " no- fault" insurance. No- fault insurance i s not
a new idea. Xt was first introduced by two law professors, Jeffrey
O'Connell and Robert Keaton in 1965 in their report Basic Protection for
the Traffic Victim. They outlined a system that eliminated the requirement
that fjult be determined before the victim of an automobile accident can
receive compensation. Professor O'Connell asserts that two of the most
important factors zontributing to the high cost of auto insurance are non-economic
damages ( most commonly, pain and suffering) and the process of
determining fault. He argues that eliminating or at least minimizing these
two variables will result in significant reductions in the cost of
insurance.
In Arizona and other states that have traditional auto jnsurance
syst~? ms, motorists purchase third- party 1 iabil i ty insurance to protect
thenselves against lawsuits if they are negligent and cause injcries to
other persans. No- fault insurance differs in that motorists buy Personal
Injury Protection ( PIPA) which provides first- party coverage ( compensation
paid by a pol icyholder's own insurer rather than the insurance company of
the person that caused the accident) to them, their passengers and
pedestrians they may hit. With this coverage, the occupants of an
insured's car and pedestrians who suffer injuries can be compensated
quickly for medical expenses and other economic losses up to the PIP
coverage limits chosen by the insured or mandated by law. Typically, this
coverage pays for medical expenses, lost wages, rehabilitation, replacement
serv; ccl costs for such things as housekeeping and child care, and funeral
expenses. PIP usually excludes ceverage for insureds while motorcycling,
drunken driving, i n the carmission of serious crimes'. ( NOTE: P I F
coverage is different than Uninsured Motorist ( UM) coverage, which i s also
f i r s t - p a r t y coverage paid by your own insurer for medicals, l o s t wages,
e t c , e t c . ... however, UM depends upon a " faultw determination showing that
the accident was caused by someone else.)
The architects of the New York no- fault insurance law, which is
currently regarded as one of the best in the country, argue that an ideal
or true no- fault law should contain the following elements:
1. Compensation of a l l auto accident victims ( without
regard to fault or assets of the negligent party).
2. A generous package of f i r s t - p a r t y benefits sufficient to
provide for economic losses ( i . e . , the payment of a l l
necessary medical b i l l s , rehabil i tative care and an
adequate income during the period of disabil i ty.)
3. Prompt payment of benefits, including periodic wage loss
payments.
4. In order to finance the generous package of f i r s t - p a r t y
b e n e f i t s , the system must provide f o r the v i r t u a l
abolition of the right to sue for non- economic 103s
( pain and suffering) except i n the most serious cases,
The three key issues i n crafting a no- fault law are:
1. Whether the right t o sue i s to preserved to any extent
( i. e ., " pure" no fault would t o t a l l y eliminate the right
to sue in auto accident cases, but in return promises
the highest premium savings).
2. If the right t o sue is to be maintained in part, the
determination of the threshold that must be reached
before a p l a i n t i f f is eligible t o use the t o r t system to
sue for damages.
3. What benefit levels should be set for medicals, l o s t
wages, death, etc.
When no- fault laws were f i r s t adopted in the late 1960s the right to
sue thresholds invariably contained a set monetary amount. This had the
effect of driving up clairt costs because i t gave victims with minor
I n J u r l e s aq ~ n c e n t ~ vteo r u n up big medical b11ls i n order t o pass a
mo~~ et. aryth reshold to be el igible t o bring s u i t . ) This problem has led
proporents of no- fault to argue in favor o f verbal thresholds ( t h a t r e q u i r e
rnjurics to be both " serious" permanent") and against monetary ones.
In several s t a t e s , no- fault was simply tacked onto the l i a b i l i t y system,
assuring r n ~ n i r n u m benefits to everyone without limiting t h e i r a b j l i t y to sue
f3r more.
The following tables present a comparison of pure t ~ r tpr emiums and
p L r e no- f u l t premiums in the s t a t e s with no- fault insurance laws. ( NOTE:
~~~~~~ 1 premium are t h a t p a r t of actual premiums used to pay for claims;
t h e r e f o r e , the v a g a r i e s of a d m i n i s t r a t i v e and s a l e s expenses a r e
e l i n i n a t e d . ) Florida, Michigan and New York are the only s t a t e s t h a t use
verbal thresholds a t the present time.
Insert Table V. 1 Here
Critjcs of no- fault insurance contend t h a t s t a t e s that have adopted no-f
a u l t do not have lower insurance prices than s t a t e s without no- fault laws;
bowever, no s t a t e has adopted " pure" no- fault where the r i g h t to sue has
been t o t a l l y eliminated in auto accident cases. Moreover, the foregoing
c h a r t fndicates t h a t those s t a t e s adopting " verbal" thresholds experienced
substanti a1 premium savings.
" Mandatory" n o - f a u l t i n s u r a n c e i s a l s o c r i t i c i z e d as being
unconstitutifinal due to Article 4, Ssction 31 and Article 18, Section 6 of
the Arizona State C o n s t i t ~ l t i o n . However, the Constitution doesn't address t h e
i c t ~ d o f nnn- rdndatory ( I . ., " o p t i o n a l " n o - f a u l t ) e i t h e r of the variety
a1 ready i i d o p t t d I n Kentucky or that suggested by Professor OICor, rJl 1 .
Table V . l
A Comparison of Eztimated 1987 Tort Injury Coverage
Pure Premiums to 1987 No- Fault Injury Coverage ? ure Prernizms
Changes
in Injury
1987 Coverage
Estimated 1987 No- Faul t C0st. s Under
1957 Tort Pure Pure ho- Faul t**
Thresh07 d Premi urns Premiums 1987 1982
- V- e- r- b- a l T-- h-- r eshold
Fl orida
Mi cii i gan
New ' fork
Verbal 187.32 157.45 - 16% - 21%
Verbal 171.67 116.57 - 3 2 % - 1 7 %
Verbal 198.48 138.12 - 3CX - 6%
-.- - I -- h-- i- . eshold $ 1,000 o r More
tiawa i j $ 5,600 141.49 147.82 4% 37%
Minnesota 4,000 138.97 112.59 - 19% - 2%
Ut;* h 3, OOOf 82.22 85.00 3% - 13%
", I orado 2, 500f 90.70 131.86 45% 15%
p$ 3rth Dakota 2,500* 66.11 49.81 - 25% - 19%
K. n? ucky 1,000 93.96 75.06 - 20% - 29%
" T.--.-- h- reshold Less than $ 1,000
Geotagi a S 500 91.32 107.24 17% 15%
i < d i ? ~ d ~ 500f 74.90 58.87 - 21% - 9%
Massach~ isetts 500 231.70 173.99 - 25% - 33%
Connecticut 400 162.54 170.92 5% 14%
New Jersey 200* 183.59 226.77 24% 65%
Ada- On States
Oregon None 113.62 110.01 - 3 % - 0%
Del at% larc? None 108.56 173.13 59% 17%
Mary i and None 134.63 170.10 26% 26%
Pennsylvania None* 118.61 162.78 37% 53%
* Threshold was raised between 1982 and 1987. Colorado raised i t s threshold
from 5503 t o $ 2,500, effective 1/ 1/ 85. North Dakota raised i t s threshold
fi" om $ 1,000 to $ 2,500, effective 7/ 1/ 85. Hawaii's threshold was $ 1,500 i n
1982. Since 1982, the s t a t e ' s t o r t threshold has been raised several
times. Utah increased i t s threshold from $ 500 t o $ 3,000, effective 7/ 1/ 86.
Pennsyl vhnia el iminated i t s $ 750 t o r t threshold, e f f e c t i v e lO/ i; 84. New
Jerssy adopted an optional $ 1,700 t o r t threshold, e f f e c t i v e 7/ 1/ 84. Kansas
r a i s e d it.:; threshold to $ 2,0C0, effective 1/ 1/ 88.
*"* A n e g a t i v e r e s u l t i n d i c a t e : an insurance cost savings under no- fault. A
p o s i t i v e figure indicates an Trcrease in costs under no- fault.
This wuld g i v e the inaurance consumer a choice of purchasing e i t h e r
no- fault or tort- based automobile insurance. Under t h i s system, i f two no-f
a u l t insureds have an auto accident, each party's insurance company would
pay them for damages and losses sustained in the accident. If two t o r t -
based ins3reds suffered injuries in an accident, they would sue each other
as is the current practice in Arizona. Under Kentucky's system, i f a t o r t -
based insured and a no- fault insured were involved in an accident, the
party with no- fault would be compensated by his own insurance company and
the party with tort- based coverage could sue the no- fault insured's
insar; ince company for any negligence by the no- fault insured. Under
Professor O'Connell's approach, i f a tort- based insured and a no- fault
insured were involved in an accident, the party with no- fault would be
compensated by his own insurer and t h e p a r t y with t o r t based coverage could
sue his own insurance company to recover damages ( s i m i l a r t o the process
now used in uninsured motorist cases).
Either of these systems would minimize the costs of non- economic
damages and of adversari a1 1 egal proceedings, thereby offering a real
change f o r substantial and sustained premium savings!
ow No- Fault Auto Insurance Yorks - If We Let I t " ( extracted from the
Journal of American Insurance, Third Quarter, 1988).
' N O - ~ a u l t : Has the Performance Met the Promise?" by John D. Reiersen, CFE,
CPCU, Assistant Chief, Property and Casualty Insurance, S t a t e of New York
Insurance Department ( extracted from The Bulletin, S t a t e of New York
Insurance Department, March, 1985).
3 " ~ e l l i n g No- Fault Auto Insurance" by Peter Passel1 ( extracted from New
York Times, November 23, 1988).
VI. Traffic Safety Issues
lraffic safety issues impact the cost o f insurance to a considerable
degree. Accidents, and their causes and effects, together with the
p r o b a b i l i t y o f having an accident are major factors in increasing insurance
ci3sts. Generally, traffic safety is a combination of state- imposed and
self- generated ( by the driver) actions and restrictions, as well as the
vari o b s conditions and construction of the roadways traveled.
In the idea1 situation, a skilled driver, using courtesy, cauticn and
ktlert::? ss, would be most likely to avoid accidents. A key indicator, alor~ g
with those normally associated with stability, is a past record cf no
citations or accidents; the longer, the better. This is as it should be,
since the presence of citations or accidents are clear indicators of
accident probability, with higher frequency of either tending to assure the
probabilfty of at fault accidents in the near future.
In a study of California drivers, cocducted by Ray Peck for the
Jo: innal of Traffic Safety Education, 28% of drivers studied in one year
contributed to 56% of the accidents in the following year. Drivers with
two or more citations ( 10.2% of all drivers) had 34% of the accidents,
while th2se with one conviction ( 17.8% of drivers) had 32%. This points up
the need for tracking of drivers who fall into these categories.
The Arizona program couples mandatory insurance with certain actions
by the state. These include certification at the time of vehicle
registration, a requirement to carry evidence of insurance in the vehicle,
random sarnpl ing of vehicle owners to see if insurance was in effect at the
time of sampling and notification to the state that an accident occurred
and the pt3rsoq causing the accident did not provide evidence of insurance.
Queries are sent to the owner to prove that insurance was in effect at the
time of the accident.
In the random sampling, if the vehicle owner is found to not have
insurance, a suspension of the license and vehicle plates is made until the
owner brings in evidence that insurance has been obtained. This is done
through a special SR- 22 policy which provides for the insurance company to
notify the state if the policy is cancelled. In the cases where an owner
did not have insurance at the time of an accident, the suspension period is
one year for all owners' driver licenses, as well as the vehicle plates.
At the end of the year's suspension, an SR- 22 is required. People arrested
for driving on a suspended license or no insurance are subject to seizure
of the plates by the arresting officer.
Legislation passed in 1988 expands the scope of this program to
require police officers to check for evidence of insurance on all stops,
and after June 30, 1989 the random sampling would include persons cited for
driving with expired registrations and those who did not renew insurance or
cancelled their policy as provided to the state by insurance companies.
While the sampling of owners who were convicted of driving without current
registration is expected to turn up more drivers who may not have had
insurance, the sampl ing of pol icy cancellations may not reveal many people who
do not have insurance since they may have simply changed insurance companies.
Then, too, according to industry sources, vehicle owners who have had
insurance are more 1 ikely to continue to insure. It is the chronic offenders
and the poorer vehicle owners who are most 1 ikely not to have insurance.
Persons with many citations are subject to the highest insurance rates, as
much as $ 3,000 to $ 5,000 per year i. n premiums, and are therefore least 1 i kely
to o b t a i n insurance.
Testimony before the Committee also discussed such enforcement actions
as broader insurance samplings from those most likely not to have
insurance, such as those with many violations or accidents. It also
suggested a wider involvement by vehicle dealers to verify insurance before
a sale is completed, and by lenders to impound money for insurance
payments. It appears that further study is needed concerning the mandatory
insurance program and the methods used to verify insurance.
Traffic Safety
Another area of consideration has been the traffic safety training of
drivers. The education of drivers begins with obtaining a learner's
permit, actual driving experience, written testing and on- road testing by
the MVD.
MVD oversees Traffic Survival School ( TSS) programs by certi fyi ng
instruction courses, teachers and by assigning mu1 tiple violators to the
schools. Usually, a driver is assigned to TSS upon the accumulation of
eight points in a twelve month period. Points are given to each violation,
with two for minor moving violations, such as failure to yield, three for
serious violations including speeding and six or eight points for major
violations like drag racing, DUI's, or leaving the scene of an accident.
The TSS training is given under strict guidelines as to course content and
methods of presentation.
Diluting this program, however, is the assignment by courts to
citation diversion schools. Attendance at these schools usually expunges
the ticket, so no record of violations is kept by MVD. Because no record
exists, it is possible to go to several schools in various cities, and, in
fact, one city will assign a person to a diversion school no matter how
many tickets he o r she might have. While there may be some educational
value in attending these schools, there is no standard curriculum and very
l i t t l e is done to assure the quality of content or instruction. Therefore,
i t is possible that before the f i r s t citation is recorded with MVD, a
person could have had three or more serious violations. H. B. 2615,
introduced in the Legislature this year, will attempt to address this
problem by regulating the courses, the instructors and the number of times
a diversion school may be attended before points are assessed. The Study
Commission has already gone on record as favoring this legislation in a
l e t t e r sent to House and Senate leadership early in February.
Drunk Driving
The drunk driver i s a distinct threat t o t r a f f i c safety. In recent
years, the 1 egis1 ature has become increasingly tougher on these drivers,
enacting laws designed to quickly administrate civil penal t i e s such as
license suspension.
One of the laws i s Admin Per Se ( administrative i n i t s e l f ) .
Introduced in the 1987 Legislative session, the statute requires law
enforcement officers to take the driver license on the spot from a person
arrested for driving under the influence of alcohol ( D U I ) . An order of
suspension and a temporary, 15 day license is issued t o the driver at that
time. The driver license is sent t o the Motor Vehicle Division within five
days. A request form i s also given to the driver, who may apply for a
hearing on the suspension within 15 days. If no hearing is requested, the
suspension will take effect after the 15th day. About 25% of drivers
suspended during 1988 asked for hearings.
The statute, which became effective January 1, 1988, placed additional
power and paperwork in the hands of law enforcement officers. In preparing
for the Act's implementation MVD designed and produced an affidavit which
would incorporate all the necessary information and forms needed for
officers to make DUI arrests and suspend driver licenses. The intent was
to make it as easy as possible for officers to invoke the suspension.
An earlier law, called Imp1 ied Consent, was passed in 1983. Applying
for and accepting the privilege to drive a vehicle in Arizona, the 1 icense
gives consent to testing for blood alcohol concentration if arrested for
drunk driving. If the driver refuses to take or fails to complete the
test, hVD suspends the driver license for one year.
Before Admin Per Se, if the driver completed the test and was found to
have a blood alcohol concentration ( BAC) of .10 or higher the case was sent
to court for arraignment and trial. The 1 icense was not suspended until a
conviction was handed down and MVD ordered to suspend the 1 icense. This
often took months, while the person continued to drive and frequently
commit additional violations or even have fatal accidents.
Admin Per Se was intended to get this driver o f f the road as soon as
possible, and it appears to be working. After one year in effect,
statistics show that 21,796 drivers were suspended who would still be
driving without the new law. ( See Tables VI. l and V I . 2 ) .
Table VI. l
28- 692 ( Court Ordered)
28- 691 ( Implied Consent - MVD)
28- 694 ( Admin Per Se - MVD)
Total Number of A1 coho1 - Re1 ated Suspensions
1988 - December 31
Affidavits Received
Voided
Val id Affadavi ts
Dismissed Hearings
In System
* 7,691 Hearings He1 d
Suspension by MVD 21,796 APS
5,258 IC
Total Suspensions
" Equals 93% of Affidavits Received
Left in System December 31
January
February
March
Apr i 1
May
June
July
August
September
October
November
December
Total
* I988 Data is Preliminary
Table V1.2
Alcohol - Re1 ated Accidents
SOURCE: Traffic Studies Branch
Traffic Records Unit
VII. Recommendation I: Defensive Driving Schools
The Study Commission on Private Passenger Automobile Insurance
recognizes that any reasoned consideration of escalating insurance rates
must include some attention to selected traffic safety issues. One of the
topics that has come to the attention of the Study Commission is the
apparent abuse of the defensive driving school option by those charged with
traffic violations,
Briefly, our concern has been with allegations that there is currently
no real over; ight of defensive driving schools in Arizona; that, because of
a 1 ack of coordination among 1 ocal jurisdictions, individual drivers could
have multiple and serious traffic citations excused by different
jurisdictions at the same time; and that the current situation makes it
very difficult for the State of Arizona to identify those drivers who
should receive substantial remedial training or should be denied the right
to drive.
We have reviewed a draft of a bill that has been written by
representatives of the Arizona Supreme Court and ADOT's Motor Vehicl e
Division. The Study Commission be1 ieves that this legislation-- which will
call for the setting of minimum qualifications for instructors and course
content, certification of these schools by the Motor Vehicle Division, and
the development of an automated data management system to keep track of
those attending these school s-- will address most o f the abuses currently
associated with the use of the defensive driving schools.
The Study Commission does urge that this proposal be amended to state
that an individual is permitted use of this alternative to normal
processing of a traffic citation only once every five years.
VIII. Recomnendation: No- Fault Insaurance
The unanimous sense of the Study Commission members present and voting
is that no- fault insurance offers promise of real cost savings in the
provision and consumption of automobile insurance. At this time, not all
members of the Study Commission are confident of the magnitude of the
savings which would be realized, but we all do believe that such structural
change in the way insurance is provided to the consuming public will
be required to achieve long term savings in the cost of insurance.
It is clear that a variety of no- fault systems exist among the states
that have gone to this type of insurance program. It is also clear that
certain factors must exist in a no- fault system if it is to achieve the
cost savings which we all seek:
1. To preserve the sovereignty of individual choice-- as
we1 1 as avoid probable constitutional chal lenge-- the
Study Commission endorses the concept of an optional no-fault
system;
2. This system must include a strong verbal, not monetary,
threshold ( that requires injuries to be both serious and
permanent) beyond which the right to sue can be employed;
3. Cost savings will be proportional to both threshold that
is adopted and the level of benefits which are offered;
It is important to understand this recommendation in the context of
the interim report in which it is offered. There are other possible
strategies that may achieve cost savings. But among those strategies
reviewed by the Study Commission to this point, no- fault insurance is the
one alternative which does appear to offer real savings in both the
administration of an insurance program and in the cost of this product to
the consumer. The conditioned recommendation offered in support of no-
fault at this time is simply a product of the developing empirical base the
Study Commission has earnestly sought for each of the policy alternatives
we have examined. As additional material is reviewed by the Study
Cornrni ssion, we shall provide further comment about the estimated size of
cost savings, among other topics.
BIBLIOGRAPHY OF EXHIBITS/ REPORTS/ LAUS
SUBMITTED BY THE
ARIZONA DEPARTMENT OF INSURANCE
TO THE
STUDY COHMISSION
ON
PRIVATE PASSENGER AUTOMOBILE INSURANCE
1. P u b l i c p o l i c y s t a t e m e n t ( 10/ 13/ 88 Handout; Tab I ) .
2. Legal context i n which c u r r e n t p o l i c y is based ( 10/ 13/ 88 Handout;
Tab 11).
" Recap of rate law
" A r t i c l e 4 . 1 , Chapter 2 , T i t l e 20
3. Glossary of i n s u r a n c e t e r m s ( 10/ 13/ 88 Handout; Tab 111).
4. Current s t a t u s of r a t e s i n Arizona ( 10/ 13/ 88 Handout; Tab I V ) .
" Rate v e r s u s p r i c e
" Premium comparison
" B e s t ' s s t a t e r a n k i n g
" Arizona b r i e f i n g s h e e t
" 1983 - 1988 r a t e r e v i s i o n s of t o p t h r e e Arizona i n s u r e r s
" Premium i n c r e a s e s compared t o CPI
" 1982 - 1987 premium/ loss experience of t o p t h r e e Arizona
i n s u r e r s
5. E x h i b i t showing how many states have mandatory a u t o i n s u r a n c e
and/ or no f a u l t i n s u r a n c e and t h e i r average automobile premium
( 11/ 4/ 88 Handout; Tab A).
6. Copy and summary of any l a w s p r o h i b i t i n g o r l i m i t i n g t e r r i t o r i a l
o r zone r a t i n g and d e f i n i t i o n of " r e d l i n i n g " ( 1 1 / 4 / 8 8 Handout;
Tab B ) .
7. E x h i b i t showing t h e l o s s e s and expenses of t h e t o p t e n i n s u r e r s
i n Arizona ( 11/ 4/ 88 Handout; Tab C ) .
8. Charts akin t o t h o s e a l r e a d y prepared f o r Farmers, S t a t e Farm,
and A l l s t a t e f o r i n s u r e r s having t h e h i g h e s t p r i c e on t h e 1988
a u t o premium c o m p a r i s o n a n d f o r t h e t o t a l i n d u s t r y i n A r i z o n a
( 11/ 4/ 88 Handout; Tabs Dl E, F, and G ) .
9 . " Performance Audit, Department o f T r a n s p o r t a t i o n , Mandatory Motor
Vehicle Insurance Program," r e p o r t t o t h e Arizona l e g i s l a t u r e by
the Auditor General, September 1987, 87- 7 ( 1 1 / 4 / 8 8 Handout;
Tab H ) .
1 0 . E x h i b i t showing how u n i n s u r e d m o t o r i s t r a t e s have i n c r e a s e d
( 1 1 / 4 / 8 8 Handout; Tab I ) .
E x h i b i t showing what element o r combination t h e r e o f is d r i v i n g up
c l a i m s ' c o s t s by s u b l i n e ( work i n p r o g r e s s ) ( 11/ 4/ 88 Handout;
Tab J )
E x h i b i t showing how a u t o r e p a i r , a t t o r n e y f e e s , and medical c o s t s
a r e i n c r e a s i n g ( work i n p r o g r e s s ) ( Untabbed).
E x h i b i t showing p r i v a t e passenger a u t o m o b i l e e a r n e d premiums,
i n c u r r e d l o s s e s and margins ( Arizona) ( 1 / 2 0 / 8 9 Handout; Tab K ) .
E x h i b i t showing p r i v a t e passenger a u t o m o b i l e e a r n e d premiums,
i n c u r r e d l o s s e s and m a r g i n s ( c o u n t r y w i d e ) ( 1/ 20/ 89 Handout;
Tab L ) .
E x h i b i t showing 1981 and 1987 d i s t r i b u t i o n of p r i v a t e p a s s e n g e r
a u t o m o b i l e o u t g o f o r t h e t o p t e n A r i z o n a companies ( 1 / 2 0 / 8 9
Handout; Tab M ) .
E x h i b i t showing automobile maintenance and r e p a i r component and
a u t o m o b i l e bodywork component of t h e U. S. CPI compared t o t h e
U. S. CPI- A11 I t e m s ( 1/ 20/ 89 Handout; Tab N ) .
E x h i b i t showing automobile maintenance and r e p a i r component and
automobile bodywork component of the Phoenix area CPI compared t o
t h e Phoenix a r e a - A l l I t e m s ( 1/ 20/ 89 Handout; Tab 0 ) .
E x h i b i t showing Arizona s e m i - p r i v a t e h o s p i t a l room r a t e s v e r s u s
t h e Phoenix and U. S. consumer p r i c e i n d i c e s ( 1/ 20/ 89 Handout;
Tab P ) .
Photocopy of " An E m p i r i c a l I n v e s t i g a t i o n of t h e Costs of Adopting
Nofault I n s u r a n c e Systems: 1971 - 1980" by Joseph F. Johnson,
George B. F l a n i g a n , and James K. Weeks ( e x t r a c t e d f r o m t h e
J o u r n a l of I n s u r a n c e R e g u l a t i o n , December 1983) ( 1/ 20/ 89 Handout;
Tab Q ) .
Photocopy of " Comment: T h e C o s t of No- Fault'' by George B.
Flanigan, James K. Weeks, and Joseph E. Johnson ( e x t r a c t e d from
t h e - J- o u r n a l o f I n s u r a n c e R e g u l a t i o n , December 1983) ( 1 / 2 0 / 8 9
Handout; Tab R )
Photocopy of " Nofault: A Review of its Cost" by Claude C. L i l l y ,
I11 a n d B e r n a r d L . Webb ( e x t r a c t e d f r o m t h e
J o u r n a l of I n s u r a n c e R e g u l a t i o n , December 1983 ( 1/ 20/ 89 Handoct;
Tab S ) .
Photocopy of " The Cost of No- Fault: A Methodological Note" by
Robert S. Lawson, Gregory W. H e i d r i c h , and Lawrence W. S o u l a r
( e x t r a c t e d from t h e J o u r n a l of Insurance R e q u l a t i o n , March 1985
( ? / 3 / 8 9 Handout; Tab T).
P h o t o c o p y o f " N o - f a u l t : I s Modeling t h e Answer?" by C l a u d e C.
Lilly, I11 and Bernard L. Webb ( e x t r a c t e d from t h e - J- o- u- r- n- a- l- - o- f
I n s u r a n c e R e g u l a t i o n , March 1985) ( 2 / 3 / 8 9 Handout; Tab U).
Photocopy of " No- fault I n s u r a n c e A f t e r Three Years" - a Report to
t h e Governor p u b l i s h e d by t h e I n s u r a n c e Bureau, Michigan
Department of Commerce, October 6 , 1976 ( 2 / 3 / 8 9 Handout; Tab V ) .
Photocopy of " No- fault Insurance i n Michigan: ' Consumer A t t i t u d e s
a n d P e r f o r m a n c e " - a R e p o r t t o t h e Governor p u b l i s h e d by t h e
I n s u r a n c e B u r e a u , M i c h i g a n D e p a r t m e n t of Commerce, A p r i l 10,
1978 ( 2/ 3/ 89 Handout; Tab W ) .
Photocopy of " Report t o C o n g r e s s on t h e E f f e c t s of t h e 65 mph
Speed L i m i t During 1987," January 1989, p u b l i s h e d by t h e N a t i o n a l
Highway T r a f f i c S a f e t y A d m i n i s t r a t i o n , U. S. D e p a r t m e n t of
T r a n s p o r t a t i o n ( c o n t a i n s c o m p a r i s o n s of A r i z o n a w i t h o t h e r
states) ( 2 / 3 / 8 9 Handout; Tab 1).
Photocopy of Arizona Department of Public S a f e t y , Highway P a t r o l
Bureau p u k l i c a t i o n " I m p a c t of t h e 65 mph Speed L i m i t " ( 2! 3! 59
Handout; Tab 2 ) .
E x h i b i t showing a c c i d e n t comparisons on r u r a l i n t e r s t a t e highways
f o r t h e p e r i o d A p r i l 15, 1986 through December 31, 1988 produced
by t h e A r i z o n a D e p a r t m e n t of P u b l i c S a f e t y , Highway P a t r o l
Bureau ( 2 / 3 / 8 9 Handout; Tab 3 ) .
Photocopy o f t h e A r i z o n a T r a f f i c A c c i d e n t Summary - 1987
( p r i n t e r ' s p r o o f s ) p u b l i s h e d by t h e A r i z o n a D e p a r t m e n t of
T r a n s p o r t a t i o n ( 2/ 3/ 89 Handout; Tab 4 ) .
P h o t o c o ~ v of " How No- fault Auto Insurance Works - I f W e Let I t " & A
( e x t r a c t e d from t h e J o u r n a l of American I n s u r a n c e , t h i r d q u a r t e r
1988 ( 2/ 10/ 89 Handout; Tab 5 ) .
Photocopy of " No- fault: H a s t h e Performance M e t t h e Promise?" by
John D. R e i e r s e n , CFE, CPCU, A s s i s t a n t C h i e f , P r o p e r t y and
C a s u a l t y I n s u r a n c e , S t a t e of New York I n s u r a n c e D e p a r t m e n t
( e x t r a c t e d from - T- h- e-- - B u l l e t i n , S t a t e of N e w York I n s u r a x l c e
Department, March 1985) ( 2/ 10/ 89 Handout; Tab 6 ) .
Photocopy of " L i t i g a t i o n of C a t a s t r o p h i c In j u r y Cases i n t h e No-f
a u l t ~ ; a : The - ~ e w York E x p e r i e n c e " by Neal A. G o l d b e r g
( e x t r a c t e d f r o m t h e - A r b i t r a t i o n J o- u- r- n a l , M a r c h 1 9 8 5 ( 2 / 1 0 / 8 9
Handout; Tab 7).
Photocopy of " Why You Pay More Than t h e Next Guy" by P e t e r D.
Lawrence ( e x t r a c t e d from Esquire, August 1988) ( 2/ 10/ 89 Handout;
Tab 8 ) .
Photocouv o f " T r o u b l e d T i m e s F o r Mass. Auto I n s u r e r s " by N e i l * .
McGhee ( e x t r a c t e d from t h e - N- a- t- i- o - n a- l- - U - n- d e- r- w- r- i- t- e- r , P r o p e r t y &
C a s u a l t y e d i t i o n , June 13, 1988) ( 2/ 10/ 89 Handout; Tab 9 ).
Photocopy of " S e l l i n g No- fault Auto Insurance" by P e t e r P a s s e l l
( e x t r a c t e d from The New- York Tim-- e s, November 23, 1988) ( 2/ 10/ 8O
Handout; Tab 10).
3 6 . P h o t o c o p y o f " F a c t o r s A f f e c t i n g Urban A u t o I n s u r a n c e C o s t s , '
Decerrber 1988, p u b l i s h e d by I n s u r a n c e Services O f f i c e , I n c . ant
N a t i o n a l r \ s s o c i a t i o n of I n d e p e n d e n t Insurers ( 2 / 1 7 / 8 9 H a n d o u t ;
Tab 11).
Study Commission on Private Passenger
Automobi 1 e Insurance
Support and Opposition for
Sections of the Report
Recommendation
Present & Voting I I1 111 IV V VI 1 2
Wi l son
Carson
Kennedy
Mills
Gal 1 i nger
Hurl but
Garrett
Hair
Monie
Zuccaro
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
NO YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
YES YES YES YES YES YES YES YES
NOSE: Bl ank indicates absent and not voting
Member Present and Abstaining
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DeLong YES
Members Absent
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corpstei n
Hi guera YES
Pri ns YES
NOTE: Members Mills, DeLong, and Corpstein were appointed to the Study
Commission after the convening of the 1989 legislative session.
Representative Mill's appointment came early enough to permit her to
actively participate in the del i berations of the Commission. Senator
DeLong has been able to attend the Commission's most recent meetings but
Senator Corpstein has not.